Whether you’re just getting started in your new business, or you’re expanding an existing retail business by taking it online for the first time, you’ll need to know something about getting paid. Today’s shoppers use plastic, so you’ll want to accept credit cards. You’ll have many choices when it comes time to set up a merchant account. But, regardless of which approach you choose, you’ll need to understand (and even speak) the language. So, keep reading to get a quick look into the world of merchant accounts, discount rates, and settled batches.
Since I’ve already written in depth on this same topic elsewhere, I’m only going to hit the high points in this post. After all, you probably didn’t come here looking for details anyway. When you’re ready to bite off a little more, you can explore my other posts. I also recommend reading this popular article I submitted at HubPages. It contains more details on all the topics covered here.
Some of the terms you’ll need to get acquainted with include Merchant Account, Acquiring Bank, Card Issuing Bank, and Authorization. To begin, think of a credit card transaction as a guaranteed I.O.U. Yes, you’ll get paid, but it’s going to cost you something, and it’ll take a day or two for you to see the cash.
The card-issuing bank represents your customers. The bank name may be printed on the front of your customer’s credit cards (i.e., CitiBank or Capital One). When you swipe a customer’s credit card through a terminal, you’re asking that customer’s card-issuing bank whether or not they’ll cover your customer’s (their client’s) debt. If the bank agrees, you’ll receive an authorization number that’s good for the requested dollar amount. That’s your I.O.U.
Authorizations have no value unless someone is willing to convert them into cash for you. That’s where the acquiring bank comes into the picture. To accept credit cards, you’ll first need to open a merchant account with an acquiring bank. These are usually very large banks that may, but probably will not, have a local branch in your town. Your merchant account, although it is a bank account, will not function like a typical checking or savings account. Its sole purpose is to take your authorizations (I.O.U.’s) and collect on them. Once that’s done, the money is automatically sent via ACH transfer to your business’ checking account at your local bank. The entire process takes only 24-48 hours.
There are several ways to set up a merchant account with an acquiring bank. Most local banks will act as resellers for large acquiring banks. To choose the local option, you just go to your bank and open the account. You will almost certainly pay much higher discount rates and fees, but many business owners don’t care about the additional cost. If you have a strong personal relationship with your banker, or if you just prefer the idea of local banking, this may be the option for you.
Other options for opening the merchant account include dealing directly with the acquiring bank (usually via the web or telephone & fax) or working with a merchant services provider (who may represent several different acquiring banks, similar to the way mortgage brokers work.) Either of these options should save you money compared to your local bank, but there’s a distinct difference in the level of service you’ll receive. Acquiring banks usually won’t have a representative in your area, so any problems will have to be resolved through their call center. Merchant services providers, on the other hand, usually do have local agents (like myself) offering personal support.
Once your merchant account is up and running, you’ll need a method to enter your transactions. Retail businesses typically use a credit card terminal. Prices vary, but good terminals are available for as little as $250. Some acquiring banks and merchant services providers offer free terminals, recovering the cost by charging higher rates and fees. Some providers offer long-term leasing for terminals, with monthly payments of $30-$50. But, because leasing always results in a much higher overall cost, I discourage the practice.
For other types of businesses, entering transactions becomes more complicated. Restaurants often utilize a point-of-sale system with integrated credit card processing. These systems can greatly improve the speed and accuracy of order taking. Mail order, telephone order, and Internet merchants don’t typically need terminals. Since their customers aren’t physically present, these merchants can’t utilize a terminal’s card reader. Instead, these merchants may use a payment gateway such as Authorize.net to transmit the credit card data securely across the Internet.
E-commerce transactions processed online are the most complicated of all. In addition to a website and merchant account, the business owner will also need a shopping cart, a payment gateway, and an SSL certificate. Although many small e-commerce businesses (such as eBay stores) do accept credit cards without these components in place, I wouldn’t recommend it. Despite the costs, my personal experience in e-commerce is that merchants will benefit from having their own merchant account, payment gateway, and SSL certificate.
If this post is all you’ve read about credit card processing up to this point, you’ve still got a lot to learn. But, hopefully, you’ve gotten enough information to feel comfortable going forward. If so, go ahead and start looking for a merchant account. If not, continue reading my posts as well as those on other websites. If you have any questions at all, don’t hesitate to call me. I’d be happy to help you. Good luck!
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