Beginners' Guide to E-Commerce
Accepting Credit Card Transactions
It's worth mentioning again. Your sales will increase dramatically
when you offer your customers the ability to pay by credit card
transaction. Those of you who already accept credit cards in your
offline businesses can skip this section.
Credit card transaction is a big topic. For simplicity's sake, let's
break it down into three categories: Merchant Accounts, Internet
Merchant Accounts and Credit Card Processing Services.
A Merchant Account is a relationship between a business (i.e. a
merchant) and a merchant bank that allows the merchant to accept
credit card payments from customers.
Acquiring a Merchant Account can be difficult. Many banks or financial
institutions have stiff requirements and regulations regarding the
issuing of a merchant account. The situation will differ depending
on your bank, your country's banking regulations and your individual
situation. Many a merchant has approached their bank to discuss
a merchant account only to discover that the friendly banker becomes
less friendly. These accounts are often beyond the means of people
who are operating small or new businesses.
When you apply for a merchant account at your bank, you will be
demonstrate that your business has had an extended period of financial
stability. Expect to present your business plan, your financial
statements and various other documents. Factors
considered include cash reserves, the length of time you have been
in business, your tax returns, your credit history, debt load, refund
policies, volume of business, cost of item being
sold and other sources of income. Those who pass the stringent requirements
might be asked to put up a substantial sum of money (several thousand
dollars) as a safeguard against chargebacks or credit card fraud.
They could also be asked to pay for the software or terminals that
they will be using.
Those who are eligible for a Merchant Account will need the necessary
hardware or software. In some cases, depending on the bank and depending
on the type of business that you are operating, you will need to
purchase or rent a processing terminal -- the equipment that merchants
run your credit card across when you charge a transaction. You might
also need to acquire special software.
Before getting your merchant account, be sure to find out the full
charges that you will incur for using the service. In addition to
the aforementioned chargeback deposit, investigate hidden equipment
costs, setup fees, line charges, bank transaction fees and credit
card discount rates. These costs eat away from your profits, and
you will need to price accordingly
Also, be aware that most banks allow you to process one credit card
All major credit card companies offer their cardholders the right
to contest charges on their statements that may be the result of
theft, fraud or error.
A customer contacts his/her credit card company and complains that
the merchandise was unsatisfactory, did not arrive as promised,
or that the sale resulted as a result of a lost or stolen card.
These contested charges are called chargebacks. When a chargeback
occurs, the merchant will end up reimbursing the issuing bank the
amount of the purchase price, in addition to a chargeback fee that
can be as high as $50 or more. For example, if you sell a book for
$20 through a credit card transaction and the cardholder later contests
the sale, you will end up paying your bank the $20 PLUS a chargeback
fee of $10 to $50 dollars. When you add to this the amount that
the book cost you and the cost of mailing, if applicable, you can
see that your losses can be add up quickly.
Banks ask for a sizable deposit to protect themselves in the event
that the merchant is unable to cover the chargeback costs at the
time they occur. Merchants who incur too many chargebacks are at
risk of losing their merchant account. Somewhere between 1-3% of
total transactions is usually acceptable.
Chargeback issues are of foremost concern to a merchant hoping to
acquire a merchant account. They can result in serious financial
Note that chargebacks are not the same as the fee you pay for a
merchant-issued refund. The latter might cost you only a few dollars
High Risk Processors
Since so many small businesses are unable to arrange Merchant Accounts,
an industry has arisen to meet the need. High-risk processors are
financial institutions or companies that that issue merchant status
accounts to high-risk businesses. In this case, a high-risk business
is one that cannot arrange a Merchant Account through the bank.
These companies offset their risks by charging higher transaction
fees and higher rates than the banking institutions. However, the
initial outlay of cash that you will be asked to put up is usually
much less than the large deposits that the banks require. Some high
risk processors might offer other added features such as shopping
cart software, web site templates, forms or secure lines for ordering.
Many companies offer this service. Most are available only to US
residents, and terms of service vary. Read the fine print on the
contract and be sure you know all of the hidden charges that might
Card Service International
and Electronic Transfer
Inc are arguably two of the best-known companies of this type
in the US. However, merchants who live outside the US may encounter
difficulties. Refer to the section on International