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Accepting Credit Cards

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Once you've decided to accept credit cards, you'll need to jump through a few hoops before getting that fancy card swiper near your register. Learn what steps to take to start taking plastic.

Accepting credit cards isn't quite as easy as ordering and installing some equipment. You'll need to obtain a credit card account, usually called a "merchant account," from a bank or other financial institution in order to accept credit cards. If you have an established business reputation or you have a long-standing relationship with your banker, you probably won't have any trouble opening up an account.

Exceptions for Home, Mail Order and eCommerce Businesses

If, however, you:

  • just set up shop
  • have a mail order or eCommerce business
  • work out of your home

you may have some trouble opening an account. 

The reason being banks and credit card companies are scared to death of fraud, and so they've become much more cautious in recent years about opening new accounts. In fact, some larger banks won't even deal with you unless you have a storefront. They tend to figure home, eCommerce and mail order businesses won't do that much business, and so the credit hassles aren't worth the trouble.

If you're in this predicament, start with a medium- or small-sized bank. If possible, find out from peers where they have their merchant account. In any larger metropolitan area, you should be able to find a medium- or small-sized bank that will do business with you.

Understanding the Basics of Merchant Accounts

Before you actively begin hunting for a merchant account, save yourself (and your banker) a little time by familiarizing yourself with the basics of merchant accounts.

  • Preparing documentation. Banks will require you to supply financial information about yourself and your business. What you will have to supply may differ from one lending institution to the next.
  • Finding low rates. Banks and credit card companies will charge you between 2.5 percent and 5.5 percent of your credit sales, depending upon your sales volume and the average size of your sales. The higher your sales volume and the larger the average size of your sales, the lower the percentage you'll have to pay. In any case, not every bank will charge you the same rates.
  • Dealing in risk. If your business is considered a particularly risky business, you may not have as many options as other businesses.
  • Purchasing equipment.- Don't forget to add in the cost of the equipment you'll have to use to handle the credit card transactions.
  • Handling chargebacks. If a dispute between the customer and the credit card company results in the customer not paying the bill, you've got a chargeback to resolve. The credit card companies keep track of who these chargebacks come from, and, if you get too many, they'll cancel your account.
  • Abiding by credit agreements and policies. Take good care of your merchant account. Don't, under any circumstances, doing anything foolish that will cause you to lose your account. If you lose it because you've violated credit card policy, you probably won't ever get another one.

How Credit Card Transactions Work

The typical credit card transaction goes a little something like this:

  1. Your customer hands you the credit card or swipes it through the card reader at your checkout, or, if the transaction is handled online, over the telephone or through the mail, it begins when the customer gives you the credit card number.
  2. You to obtain permission from the credit card company to process the sale with the credit card. The authorization code will be obtained automatically. 
  3. Once you have the authority, obtain the customer's signature on the terminal or paper copy of the sales receipt. 
  4. You'll need to send the credit card sales receipts to the bank so you can get paid. This is usually done in the background by your computer's software.
  5. Your bank will authorize the charge and notify the credit card company (or some company acting on its behalf) of the charge. 
  6. The credit card company (or the company acting on its behalf) will collect the money from the bank that issued the card, send it to your bank and bill your customer. 
  7. Once your bank has the money, it will put it in your account, minus a processing fee (called the discount rate) split between your bank and your credit card company.
  8. When your customer pays the bill, the credit card company sends the money to the bank that issued the card, minus a processing fee.

Lender Requirements for Obtaining a Merchant Account

With credit card fraud costing banks and other lenders in the billions each year, merchant account facilitators are understandably skittish about commercial credit card accounts. When you go to your lender to open up a credit card account, you'll need to make a full financial disclosure in the same way that you would if you were asking for a loan. (Or even more so: we know of one small business owner who was asked to submit to an FBI check before being granted a merchant account!)

The likelihood of obtaining a merchant account from a bank will depend upon the following factors:

  • Your type of business. Certain types of businesses are considered higher credit risks than others. For example, a home, eCommerce or mail order business will have a more difficult time opening a merchant account than will a company with a traditional storefront.
  • The length of time in business. If you're just starting out, you'll have more difficulty opening a merchant account than will an established business.
  • Your general creditworthiness. Banks will want to know whether you've ever declared bankruptcy or if you have any judgments or liens against you. If you do, your chances of getting a credit card account are not good. If you're just starting out, the banks will want to look at your personal credit history.
  • Your previous merchant account status. Banks will want to know if you've ever had a merchant account before because it's a good indication of your creditworthiness.

Improving Your Chances for Approval

Take this opportunity to request a credit report on yourself. You can obtain one by contacting a credit bureau, such as Experian or Dun & Bradstreet. If anything on the report is wrong, notify the credit reporting company and keep following up until it is changed. It's important that your report be accurate because the bank may be using it to determine whether to let you open a merchant account.

Shopping for the Best Rates

Locking down the best merchant account rate is like shopping for anything else: You want the best value at the lowest price. Don't make the mistake of assuming that you'll get the same rate at every bank. Let's look at some of the terms that are important in credit card transactions.

Consider the Discount Rate

The discount rate is the sum deducted and paid to the credit card company and the issuing bank. It usually ranges from 2.5 percent to 5.5 percent of your credit sales, depending upon the volume of your sales and the typical transaction size. The discount rate is comprised of the transaction charges, the interchange rate, and the transmission costs.

Account for the Transaction Charge

The transaction charge is essentially the profit that the processing network makes. It's usually included in the discount rate, but it may be charged separately. The transaction charge is really the only element of the discount rate that you can negotiate.

Ask each bank you visit about its transaction charge and then compare the numbers. If one bank has a transaction fee higher than another bank, ask the bank why the fee is higher. You should find out if you get any additional services for the higher fee.

Determining the Rate You Will Pay

In addition to the transaction charge, there are a variety of charges that further reduce the amount you get when you accept a credit card. These charges can vary depending on several factors, including:

  • Type of business
  • Interchange rate
  • Surcharges
  • Transmission costs

For information regarding exactly how much it's going to cost to accept various credit cards. First, visit the Visa and Mastercard websites to find current rates and factors that determine which rate will be applied. Second, discuss the pros and cons of accepting each type of credit or debit card with the bank you intend to use to process those transactions.

Also remember the costs that you incur when you open your business can change over time. There is no long-term contract holding the rate you pay constant. Just as consumers face changes in the rates they pay for using a credit card, merchants face changes in the cost of accepting a card.

High-Risk Businesses and General Costs

Banks are hesitant to give merchant credit card accounts to certain businesses they deem to be particularly high credit card risks. High-risk businesses usually have a history of:

  • fraudulent activities
  • high chargeback rates
  • a high failure rate

 Although there is no standard list of high-risk businesses here are a few routinely considered high-risk (the * denotes businesses that will have an especially difficult time getting card privileges):

  • adult bookstores*
  • airlines*
  • automobile rentals
  • bail bondsmen*
  • bars without a restaurant
  • businesses without a storefront
  • check-cashing businesses*
  • collection agencies*
  • credit unions*
  • dating/escort services*
  • gambling facilities*
  • health club memberships*
  • infomercials
  • insurance sales
  • limousine services
  • massage parlors*
  • merchants who have declared bankruptcy within the past 10 years
  • pawn shops*
  • real estate-related businesses
  • self-improvement courses
  • sexually explicit telephone businesses*
  • tour companies
  • thrift travel agencies*

If you fall into one of the categories above, it does not mean that you cannot secure a credit card account. It means simply that you're going to have more trouble (in some cases, a lot more trouble) getting an account than most other businesses.

Steps for High-Risk Businesses to Take

If your business type falls on the list, you may have to shop around more than other businesses, and you may not have as many choices as they do. Also, you're probably going to pay higher fees. The credit card transaction fees range generally from 2.5 percent of sales to 5.5 percent of credit sales. If you're on the list, you're probably going to pay nearer the upper end of the scale or, in some case, above the upper limit.


If your bank won't let you open up a merchant account, consider using an Independent Service Organization. You can contract with the ISO to open a merchant account, and the ISO will contract with the bank. The ISO, in effect, bears the risk of doing business with you.

Of course, the ISO will charge you for its services. Be careful here. Although there are more than 1,400 ISOs in the U.S., they are not regulated. Make sure that you understand all the extra charges before you enter into an agreement. Sometimes you can be grossly overcharged for the equipment the ISO provides you , not to mention other hidden charges.

Credit Card Equipment

Even if you're not in a high-risk business, you'll still have to cough up some cash to obtain a credit card swiper. Choosing credit card equipment has more to do with the interface between what equipment you use at the point of sale to collect and record payment, and the software that you use to perform the accounting required.

Today, most merchants simply swipe a credit card through a cash register scanner or a dedicated computer terminal. Some credit card mechanisms interface directly with inventory control software to provide stocking and ordering information on a real-time basis. You can also try credit card swipers that hook up to your Mac or PC using a USB, or you can opt for credit card swipers that are compatible with newer mobile payment technology.

The software that accounts for sales generally will provide the option to create a printed receipt. Obviously, the receipt you get for your burger and fries at a fast food restaurant isn't too meaningful. In contrast, the receipt that an auto repair shop provides has significance to several parties.

A receipt from an auto repair shop will detail each of the elements that enter into the final cost. Components like parts, labor and materials are items that have significance to the customer, who will want to know why it costs so much does to repair a simple fender bender. The insurance company will want to see an itemized bill in order to negotiate how much to pay. And the repair shop can feed the data into inventory and bookkeeping databases. So, generating a single document from a credit card transaction that covers all of these tasks adds efficiency, in exchange for modest up-front equipment costs.

Credit Card Chargebacks Can Be a Serious Problem

If you incur too many chargebacks (when a customer disputes a charge your business makes to his or her credit card), you can lose your merchant credit card account. And few banks are keen on providing merchant accounts to businesses who've lost them.

Considering you can receive a chargeback through no fault of your own, you're not entirely in control of your own destiny. For example, the bank could issue a chargeback in error. Or you could receive a chargeback for a very common reason:

  • unauthorized use of credit card
  • no signature on the receipt
  • processing error (for example, same charge processed twice)
  • expired credit card
  • customer disputes charges (for example, wrong merchandise delivered)

So what can you do? Like a good Boy Scout, be prepared. Follow these steps for limiting your chargebacks.

Avoiding Procedural Chargebacks

Procedural chargebacks occur because you didn't follow all of the rules set by the bank. The first four items in the list above are examples of procedural chargebacks. You can reduce the frequency of these chargebacks by developing a routine that you (and your sales staff, if any) will always follow. For example, with every credit card transaction, make sure to:

  1. take the credit card from the customer
  2. check the expiration date
  3. run it through the electronic terminal
  4. ensure the signature on the receipt matches the signature on the credit card

You can never completely eliminate procedural chargebacks (how can you always know that the customer has proper authority to use the card?), but you can reduce such chargebacks with this carefully planned routine.

Remember: Always match the signature on the credit card against the signature on the receipt. Only the person whose name and signature appear on the card has authority to use it. However, most merchants will accept a credit card used by the named owner's spouse, on the theory that spouses are responsible for each other's debts. Some will also accept a card used by the cardholder's minor child, under the theory that a parent is responsible for the minor's debts.

Phone orders, of course, pose a more serious problem. For phone orders, you should get the caller's home and work phone numbers, in addition to the information you would need to fill the order, such as name and address. If you intend to verify the information before you send your merchandise, then tell the customer that's what you're doing.

Avoiding Customer-Initiated Chargebacks

Customer-initiated chargebacks occur when customers attempt to cancel the transaction for some reason, usually because the goods were damaged or because they claim the charges were excessive. A chargeback differs from a simple return of your merchandise because the credit card company is involved. In other words, the customer has complained not to you, but to the credit card company. If the customer complains directly to you, you can repay the customer without affecting your chargeback rate.

A generous return policy is good insurance against excessive customer-initiated chargebacks. If your policy is lenient, you may be able to limit your chargeback rate. You'll just have to weigh the benefits of a lower chargeback rate against the chances that some customers may abuse your lenient policy.

Chargeback Issues and Violations of Credit Card Policy

If you want to refute your customer's chargeback attempts, you'll need adequate documentation. Unfortunately, in some cases, you may not find out that your customer sought a chargeback until after the fact. Your bank is supposed to direct the dispute to you before a chargeback is initiated, but some banks don't follow the rules. If you find this happening, ask the bank to send the dispute to you first.

The documentation you need to rebut the claim will depend upon the reason your customer gives for the chargeback. If the reason is that the customer never purchased your goods, the best documentation you can have is the signed sales receipt. If the reason is that the goods were never delivered or were damaged, you need the receipt showing the method of shipment so you can trace it (and potentially collect from the shipping carrier).

You should keep all your records of sales. If you use the electronic terminal or the credit card software, the records will be kept for you automatically. If you don't, the best way to keep track is to develop a consistent approach to what you do with your records after the sale.

When You're Close to Your Chargeback Limit

It's a good idea to know what your chargeback rate is, as well as the chargeback rate limit set by the credit card company (it's usually about 1 percent of credit sales). If you're getting close to that limit on one of the credit cards you normally accept, you may want to consider asking some customers to pay their bill with one of the credit cards that isn't in danger.

The surest way to lose your merchant account forever is to get caught doing something that violates credit card company policy. Here's a look at two areas in particular that you should avoid at all costs.


When you're filling out your merchant account application, don't fudge on the numbers in order to improve your chances of getting the account. Don't misrepresent the nature of your business or the extent of your business experience. In short, don't intentionally misrepresent anything on the application. If you're caught, you may never get another chance to open an account. 

But suppose you fill out your application honestly but business conditions change,rendering the information inaccurate. Do you have a duty to inform the bank? That depends upon what changed. 

If you represented that you wouldn't be taking any credit card sales over the phone, but now you want to, you probably should tell the bank. On the other hand, if your annual sales drop slightly, you probably don't need to tell the bank. The dividing line for determining whether to tell the bank is whether you believe the information alters the credit risk the bank is taking. If you think it might, you should tell the bank. If you're in doubt, tell the bank.


A good policy for notifying the bank of business changes is to tell it before you want to make the change. Get the bank to agree to the change and document the agreement in writing (simply obtaining a letter from your banker).


In this context, factoring is the process of running the charges of another business through your merchant account in order to generate profits.

Don't do it. Period. It's wrong, and, in some cases, it's illegal. If you're not swayed by the moral or legal argument, don't do it because it's easy to get caught. All it takes is one customer initiating a chargeback, and you can lose your merchant account forever.

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