Small Business Q&A with Tim Knox
Q: I’m opening a gift shop and want to be able to accept credit
cards. I talked to the branch manager at my bank, but he didn’t
seem to know much about how it all worked. He did say that I
would need something called “a merchant account” and something
else called “a credit card processor.” Beyond that he seemed
as clueless as I am. I’m thinking about going to another bank.
Can you explain how that all works?
— Mary Ann G.
A: Mary Ann, I’m going to give your banker the benefit of the
doubt and say that a lack of knowledge regarding the specifics
of credit card processing is not necessarily a reflection of
the banker’s competence. I have found over the years that
most bankers, no matter how experienced or knowledgeable about
the banking business they my be, don’t really know much about
how credit card processing and acceptance really works. That’s
because the task of accepting and verifying credit card
purchases is handled by third party service companies who
process and deposit (or settle) the funds into a bank merchant
The decision to accept credit cards is a wise one for any
retailer. I agree with financial guru Dave Ramsey’s teachings
regarding the use and abuse of credit cards. Many people dig
deep holes with credit cards that are hard to climb out of.
But, from a practical business point of view, any retail
business that does not accept credit cards is leaving money
on the table. Research has shown that accepting credit cards
increases revenue and helps with cash flow since you receive
the money within a couple of days instead of waiting up to a
week for a check to clear.
Credit cards don’t bounce, as some checks have a tendency to do.
Credit card users are also more likely to buy on impulse and
spend more when they do. Bad news for them, but good news for
you. If you have a social conscience concerning the use of
consumer credit cards, a retail operation probably isn’t the
business for you.
To accept credit cards at a brick and mortar location you
typically need four things. The requirements may vary a little,
but the following applies in most cases.
You will need: (1) A way to enter the customer’s credit card
information into a verification and processing system. This
can be done with a swipe terminal, point of sale system, or by
calling the credit card in by phone; (2) A credit card gateway
company to verify the credit card’s validity and process the
payments; (3) A credit card merchant account in which the
gateway company will deposit payments made to you; and (4) A
business bank account into which the settled funds will
ultimately be deposited for your use.
Here’s how the process works. (1) You make a sale and the
customer pays by credit card. (2) Using a card swipe machine
who takes the card information you submit and verifies that
the card is valid and the charge can be made against the card
account. The gateway company returns an approval code for
With a swipe machine or point of sale terminal the verification
process happens in a matter of seconds. If you’re doing
telephone verification it can take a couple of minutes. You
call the gateway company, give them the credit card number and
expiration date and they give you an approval code that you
write on the credit card charge slip. Either way, the money
is typically deposited in your merchant account within 24 to
48 hours (less fees, of course).
You’ll also need to apply for merchant status with each credit
card company whose card you want to accept. To do business
with American Express and Discover all you have to do is fill
out an application, but to accept Visa and MasterCard you must
have a merchant account. A merchant account is a special bank
account set up for the expressed purpose of accepting credit
card payments processed by the gateway company. Merchant
accounts are usually associated with banks, though you can
also use credit card merchant account service companies to
perform the same function if you can not get approved for a
bank merchant account.
Applying for a merchant account at a bank is much the same as
applying for a loan. The only difference is sometimes a loan
is easier to get. There is the prerequisite paperwork to
complete and pledging of the first born, followed by an approval
process that can take up to several weeks. And you are not
guaranteed that the bank will approve your merchant account,
even if you have been a favored customer for many years.
Banks have strict regulations regarding the granting of merchant
accounts and if issuing you a merchant account in anyway puts
the bank at risk of losing money, you will be turned down.
Banks always make decisions based on economics, not
relationships (no matter what your banker tells you).
Requirements for qualifying for a merchant account varies among
banks, but in general the bank will look at the following
How long have you been in business? Business longevity
suggests a history of stability, efficient management, and
good financial health.
What is your product or service? Does your product lend itself
to a high rate of returns and chargebacks? A chargeback is a
disputed credit card charge that is refunded to the buyer and
charged against your account. You are accessed a chargeback fee
that can be as much as $20 per event. If your business lends
itself to high chargebacks, you will not get the merchant
How’s your credit report? Banks always look at how much you
owe and how you pay your bills, so it’s important to have good
financial and trade references. If you have a history of late
payments or defaults to vendors, it will count against you.
What is your anticipated volume of sales and average transaction
amount? The more money you make, the more money the bank makes.
If you anticipate just a few credit card charges per week it
may not be enough to justify the merchant account in the bank’s
Is your business categorized as a “high risk merchant?” High
risk merchants are those with the highest instances of credit
card fraud and chargebacks. High risk merchants include many
types of internet-based businesses, telemarketers, travel and
cruise businesses, and membership clubs. Being a high risk
merchant dramatically decreases your chances of getting a
merchant account with a bank.
Being a high risk merchant doesn’t mean that you can’t get a
merchant account from somewhere else. Thanks to the growth of
ecommerce in recent years there are a number of alternative
companies that will provide you with a merchant account,
sometimes with more perks than a traditional account, but
almost always with higher fees.
Also, not all banks support internet merchant accounts. If
yours does not, shop around for one that does. We’ll take
a look at accepting credit cards online in next week’s column.
Here’s to your success.
For information on starting your own online or eBay business,
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