|
BUSINESS MANAGEMENT
Just
One Word: Plastic
More and more, accepting credit cards is the way business gets done.
by Charlie Jolie
|
HOW THE PLASTIC PROCESS
WORKS
|
When a merchant makes a sale, swiping the card or keying in
the numbers, the card number, the purchase amount and the merchant
identification code travel over the card processor’s computer
network.
The card processor can either be a bank or a company that does
nothing but provide card processing services.
The transaction information then goes to a credit card computer
network. If the customer is using Visa, for example, the transaction
will go to Visa’s network.
From there, the transaction information goes to the bank that
actually issued the card. The bank then checks the account and
verifies the customer has adequate credit to cover the purchase.
The bank then sends the merchant an authorization over the network.
The sale is then complete, but the transaction is not—no
money has changed hands yet. At the end of the business day,
the merchant sends that day’s charges, called a batch,
to the card network for processing.
Individual transactions are then sorted out and sent back to
the individual cardholders’ banks. In a process called
settlement, banks then debit cardholders’ accounts and
make appropriate payments to the merchant’s credit card
processor through the Federal Reserve Bank’s Automated
Clearing House.
The card processor then credits the merchant’s bank account
for the transaction amount, minus its fees for the transaction.
Those fees also go toward paying transaction fees to the issuing
bank and the credit card network.
Despite the use of computers, it can take a few business days
before your account—the merchant account—is credited
for credit card purchases. |
Remember
the scene in the “The Graduate” when a Los Angeles businessman
takes Dustin Hoffman’s character aside and declares, “I
just want to say one word to you—just one word—plastic”?
Turns out that businessman’s vision of the future was dead
on.
If you operate a small home decorating or design firm, plastic may
be the key to future growth. Today’s consumer expects to pay
in plastic, especially for home repair items.
THE BAD NEWS
Here’s the bad news. If your small business doesn’t accept
plastic—credit cards, that is—you’ve probably got
more dissatisfied customers than you realize.
Whether for convenience, security, loyalty awards or just plain
habit, today’s consumer prefers to pay with plastic. In record
numbers, they are ditching checks in favor of credit cards.
Not offering your customers the option to pay with plastic means
fewer customers and fewer sales for your small business. If your
competitors accept credit cards and you don’t, your customers
may soon start doing business with your competitors.
BEHIND THE TREND
Here’s what’s driving the trend towards plastic:
• Credit Card Company Muscle. MasterCard and American Express
are aggressively courting consumers and small businesses with corporate
card programs that offer tremendous benefits like cash flow flexibility
and bookkeeping support. Their goal? Eliminate cash and checks from
existence.
• Skipping the Credit App. Businesses paying with plastic avoid
lengthy credit approval processes. A valid credit card carries instant
credibility and a credit line. No need to fill out those annoying
credit applications!
• Rewards Programs. Credit card loyalty programs have become
a big-time consumer addiction. Pay with a check and you get nothing.
But put it on your card, and you can receive frequent flyer miles
and other great rewards.
From the perspective of a small business, accepting credit cards
increasingly makes as much sense as using them for purchases. True,
you have to give up a transaction fee to the credit card companies
so less money hits your bank account. The average fee usually runs
between 2.5 percent and 5.5 percent of your sales. But the risk
of getting stiffed on a receivable goes away—once the credit
card transaction is authorized you know you will get your money.
And you don’t have to wait 30 days to get it either!
| WHAT ABOUT DEBIT CARDS? |
Debit cards, also called check cards, look exactly like Visa
or MasterCard credit cards but function differently.
Debit cards draw money from a bank account, rather than receiving
a line of credit like a credit card.
Debit card transactions are processed via different computer
networks and thus usually require slightly different point-of-sale
equipment. But, in contrast to credit card transactions, the
money arrives in your account right away. |
THE GOOD NEWS
If you’re bummed out that you’re losing customers because
you don’t accept credit cards, here’s the good news. It’s
easier than ever to start accepting credit card payments. The process
of setting up your small business to accept card payments is neither
mysterious nor costly.
• Step 1: Get Ready to Apply for Merchant Status
First, you must establish merchant status with each of the credit
card companies you want to accept. American Express and Discover
issue their own cards, so you need to apply for merchant status
directly with them. Simply visit their Web sites for application
details.
Visa and MasterCard are effectively brand names backed by an association.
Their association membership consists of all the member banks that
issue Visa and MasterCard credit cards. So, to start taking Visa
or MasterCard, you must establish a merchant account with one of
the several thousand banks that issue those cards. They are called
acquiring banks.
You can do this either by going directly to the bank or by working
with an independent credit card processor—a company whose only
service is processing credit card transactions for small businesses
like yours.
Establishing a merchant account isn’t always a slam-dunk. When
you approach a bank or an independent credit card processor, their
fundamental concern is that your company might go out of business
before merchandise is shipped, in which case they will have to absorb
the losses.
As such, they will thoroughly evaluate your product or service to
determine the potential for chargebacks—credit card terminology
for funds returned to customers. If they don’t deem you worthy,
sorry, no merchant account for you. Alternatively, they may ask
you to put down a security deposit—money in the bank that you
won’t touch but they can tap into just in case your chargebacks
outpace your account balance.
Given that issuers are selective in allocating merchant accounts,
it’s important to approach your application as if you were
applying for a loan. Be prepared to convince the bank you are a
good risk. You will need to provide trade references, estimate the
credit card volume you expect and what you think average transaction
size will be. Bring your business plan, financial statements and
any marketing materials (e.g. catalogs, Web screen captures and
print advertisements). Be especially prepared to provide a reasonable
estimate of how many chargebacks are likely. Satisfied customer
testimonials and a demonstration that your product or service is
priced at fair market value will help lessen their chargeback exposure
concerns.
• Step 2: Shop Around and Compare
To be sure, all merchant accounts are not created equal. Even though
they may be the best for establishing a merchant account, don’t
limit your choices to the bank that you currently do business with.
Do your homework and shop around. Taking charge of this process
by knowing what is expected and knowing your options will put you
into position to recognize and negotiate a better deal.
If you find that nobody is offering you a merchant account, find
companies that are similar to yours that accept credit cards and
ask them how they do it. If they can, you can too.
When an issuer’s representative offers to set you up with a
merchant account, compare the services, fees and terms they offer
with those of other independent credit card processors and banks.
Evaluate the hardware or software they provide—does it work
for your business?
Always ask: Is this the best deal you can give me? Is there anything
I can do to get a lower rate? You’d be surprised how willing
some issuers are to negotiate.
In some cases, great terms are too good to be true. The Internet
is littered with “Accept Credit Cards!” offers from questionable
firms, so ask other small businesses and your accountant for referrals.
|
HOW TO EVALUATE PROCESSING FEES
|
When evaluating whom to work with to set up your merchant
account, you want to examine rates, fees and equipment costs.
• Transaction rate: Each transaction costs a little bit
of money to process. But the merchant discount rate—the
percentage taken from each transaction—can vary markedly.
The bank or processor will base this rate primarily on projected
card sales volume (high sales = lower rate) and their calculation
of the risk you pose for chargebacks. Make the case that you
deserve a lower rate.
• Other fees: These details can be devils. Banks and processors
often load their agreement with fees that seem insignificant
when you are deal-shopping, but may prove painful later. There
may be chargeback fees of $50 per returned transaction, start-up
fees up to $200, per transaction communications costs of 10
to 20 cents, batch fees up to $10 per month, a postage fee for
sending statements, a voice authorization fee and even a supply
fee for charge slips.
Also, don’t forget that your telephone company may charge
you to set up a phone link for the authorization and processing
equipment. Be ready.
• Equipment costs: The equipment necessary to accept credit
and debit cards varies in complexity and price, and small business
owners must decide whether to lease or buy. Equipment can range
from the most basic array of a telephone and a $30 printer,
up to state-of-art, point-of-sale equipment that provides instant
authorization.
Generally, most firms buy point-of-sale card swiping equipment
that provides instant authorization and costs up to $1,500.
Leasing that equipment is costlier in the long term, but allows
the company to better evaluate whether it meets their needs
and also upgrade as the technology improves. |
• Step 3: Don’t Forget Your Backend Accounting System
A very important aspect to consider is whether the transaction equipment
or software you will use to accept credit cards will integrate with
your company’s computer system and accounting procedures.
Most card acceptance equipment is easily linked with small business
accounting software. In some cases, software vendors will even set
you up with a merchant account, usually via a third-party relationship
they have in place.
For example, small business management software vendor MYOB offers
a Merchant Account Service that makes it easy to process credit
card sales directly from your MYOB software. Credit card transaction
settlements are automatically and accurately reflected in daily
cash flow and invoicing procedures. Peachtree and Intuit’s
Quickbooks—two other desktop accounting software vendors—offer
similar services.
Avoid a scenario in which you start accepting credit cards and then
have to manually key in your credit card sales into your accounting
system. That’s a recipe for disaster.
• Step 4: Start Accepting Credit Cards
Once you’ve established your merchant accounts and wired up
the equipment and/or software that you’ll use to process credit
cards, you’re ready to let your customers know. Inform them
by putting credit card logos on your front door, your invoices and
your Web site. You can get those logos from the processing companies.
Before you know it, you’ll see your bank account start to rise
as the credit card sales flow in.
The bottom line is that customers, both individuals or businesses,
expect to pay by plastic. Focus on the core success of any business—giving
the customer what they want—by letting them pay how they want.
Charlie Jolie is founder and president of Small Biz Advisor, a
small business consultancy based in Chicago, IL. Jolie has been involved
in the accounting industry for more than 20 years and is an MYOB Certified
Consultant (www.myob.com/us). |
