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Summer 2004 Take Charge!

Shoppers head out itching to buy, credit cards twitching in their pockets. But if they get a daunting “Cash or checks only” message at your cash wrap, those now unhappy customers and their twitchy cards will abandon you for your competitor down the corridor—the one who takes plastic.

“Accepting credit cards is an absolute must in today’s market,” says Jim Stewart, president of EMS Nationwide, a sales organization that helps businesses sign up with credit card companies. “You can get from 10 to 30 percent more sales when you accept cards.” Customers love credit cards because they can buy now, pay later, and they know they have some recourse if they’re not happy with the merchandise. Plus, more and more cards give cardholders “rewards.” You know the drill: the more you spend, the more points you earn.

There are two types of card issuers: banks, and charge-card companies. Banks and credit unions issue MasterCard and Visa cards, but leave the job of tracking down new merchant accounts to third-party companies. American Express and Discover are charge-card companies: they issue their cards and acquire merchant accounts directly.

Merchant in the middle

To be able to accept credit cards, you need to set up a merchant account. That can be a hassle, especially if you’re a new business, but it’s by no means impossible (just look at how many retailers take plastic!). But unless you already have a track record for financial dependability, card companies may be reluctant to give you an account. Why? Because in recent years, banks and credit-card companies have been badly burned by retailers who went out of business overnight, or declared bankruptcy, or committed fraud. When that happens, the issuing banks and charge-card companies are responsible for refunding every customer who charged defective (or non-existent) merchandise.

In fact, many banks have turned the tricky business of approving new merchant accounts to outside “third-party” companies. There are two types—independent sales organizations (ISO), and card processors. ISOs exist primarily to track down potential new merchant accounts for banks. ISOs check out an applicant’s credit, coordinate the terms with the bank, and arrange setting up the necessary equipment at the merchant’s location.

Card processors, on the other hand, do the transaction work required for processing customer purchases at the point of sale. The retailer transmits the customer’s credit-card information to the card-processing company via phone lines. The company processes it and sends back approval in the form of an authorization number in a matter of seconds. But in recent years, distinctions have blurred between the two types of companies, so you may find an ISO that also processes cards, or a card processor that can take your application for a merchant account.

Retailer beware

You can get stung badly when less-than-honest sales companies do any or all of the following:

  • Collect your application fees and then disappear.
  • Quote reasonable rates for services, then jack up your bills with outrageous costs for electronic terminal equipment.
  • Bait you with a low quote, then nickel-and-dime you with tacked-on fees for every service imaginable.
  • Offer a genuinely great pricing structure, but have no staff to handle your SOS calls for service on broken equipment.

Sign up with one of these organizations and you’ll probably find yourself locked into a long-term contract that cuts a thick slice from your profits.

Doing it right

Whether you’re opening your first merchant account or want a better deal on fees or equipment than what you now have, the process can be confusing. Start by choosing an ISO carefully, because you’ll be dealing with them (rather than the issuing bank) for the duration of your contract. Then once you’ve chosen an ISO, approval can take anywhere from 48 hours to seven days. If your ISO doesn’t process your transactions and you also need a separate card-processing company, be just as careful choosing one. Here’s what experts advise:

Get advice from your local bank. Experts say your first step is to consult with the bank you know best. Approach them as if for a loan: be prepared with all the relevant financial information. Do this even if you know that the bank doesn’t offer merchant accounts: they’re likely refer you to reputable credit-card providers. By the way, you can also get names of providers from other retailers; in the Yellow Pages under “credit cards”; in the classifieds in business magazines; from your chamber of commerce; or online.

Analyze competing rates. Get competing bids, and make sure you compare the proverbial apples to apples. And these days, there are lots of apples. Once upon a time, banks bundled all of the services required to support a merchant account into one package and sold it to retailers at a single rate. No more. ISOs and processing companies now split the required services into as many pieces as possible. “Unbundling” services and individual pricing has become the norm as competing card-service providers try to convince you they can give you the best deal.

“There are all different kinds of pricing structures today,” says Karen Curry, director of marketing for National Data Corp., one of the nation’s largest card processors. “For example, an ISO may purchase wholesale services from a card processor at a certain rate, then mark it up.” Sales people may try to lure you with a low transaction percentage rate of 1-2 percent, and then make the real profit on hidden fees and inflated equipment costs.

“In many cases, sales people are highly compensated based on the equipment they sell and the fees they generate, as opposed to the processing fees,” says Biff Matthews, president of Supply Depot, which sells electronic transaction equipment. Companies may charge fees for unbundled services such as transaction processing, daily bank deposits, answering customers’ billing questions, and processing chargebacks. “Total all of the fees and you get a rate that’s often three or four times what a bank would charge,” says Matthews. “All of a sudden, the effective rate becomes 5-7 percent of each transaction.”

The lesson: “Study your contract before signing, in order to spot the hidden fees, which are so common in this industry,” says Stewart. “While sales people may not disclose them, they are in the contracts. But most people miss them until they open their statement.” In fact, billing surprises are a great source of unhappiness among merchants who accept credit cards. This leads to lots of switching among card processing companies. “A large portion of our business comes from customers switching from another processing company,” says Laurie Nelson, marketing director of Card Payment Systems in New York. “The industry is very rate sensitive.”

Analyze the equipment costs. Be especially wary of card-service providers who jack up the price of the electronic card-processing equipment, including the printer. Overcharging for equipment is are the most common technique for inflating bills. Matthews describes one such scenario: “Suppose an ISO pays $180 for a piece of equipment. They sell it to their next-tier regional manager for $500. Then that manager sells it to a sales person for $800.” Guess what the sales person does: sells it to a retailer for even more.

But they often put the details in the form of a long-term lease that appears to have attractive monthly terms. However, a retailer signing a three-year lease often ends up spending $3,000 for equipment that should have cost no more than $600.

A word of caution: Some firms won’t sign a service contract until you agree to their equipment terms. If that happens, make doubly sure you’re not being overcharged. And don’t sign for equipment until you know your application has been approved: you may get stuck with an equipment contract but no service. In any event, don’t sign an equipment lease for more than 36 months, because this technology leapfrogs every three years.

Assess the company’s reliability. Price is important, but don’t select a company on price alone. You want one that has quality equipment and the personnel to provide reliable, 24/7 service. Ask their current customers some key questions.

  • Does the equipment work well? Is it reliable?
  • How quickly does the service provider fix broken equipment?
  • How quickly does the money from a sale end up in the retailer’s bank account? Depending on the provider, this can be 48 hours to 10 days. (Service providers are tempted to make money on the float.)
  • What’s the “uptime” percentage—the portion of the day when the transaction process is working? Although downtime is rarely a problem, find out if your prospective card service provider is the exception.
  • How long does it take to get approval for customer transactions? Typically, they take four to seven seconds, up to perhaps 15 seconds during busy holiday shopping seasons.
  • Does the company provide the reports a retailer needs for analyzing sales? Are daily reports available for number of transactions, sales and chargebacks?
  • Is the company ethical? Before signing with a service provider, check its reputation. Ask your local bank, the Better Business Bureau, and the chamber of commerce. “Ask for the names of several current clients who have been with them for more than two years,” says Matthews. “Then check with the clients.”

Don’t rush. Before signing a contract, ask to hold it for a day or so to study it—and have your attorney review it. And never give a sales person a deposit before you’ve thoroughly investigated the offer. Attention to detail helps you get the best deal and avoid costly pitfalls. Then once you’re set up, you’ll likely find that “taking plastic” is a synonym for “more sales.”


Phillip M. Perry

Perry is a freelance writer based in New York, NY.

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