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setting up a merchant account

One of the questions we at Epoch Online are most often asked is "How do I set up a merchant account?" It's surprisingly easy, so here is some information that will get you started on establishing a credit card merchant account.

Visa, MasterCard, and most big credit card companies are associations of banks that issue the association's credit cards to individuals and businesses ("issuing banks"), and banks that acquire the right to receive payment for charges ("acquiring banks").

The three things that you'll need to begin accepting credit card payments are:

• a merchant account with an acquiring bank
• equipment to process credit cards, or software to process information online
• an agreement with a company that verifies the credit card information, processes the transaction, and deposits funds into your merchant account

You can then accept credit cards, obtain authorization for charges, and receive funds in your account. A bank or an independent sales organization ("ISO") will usually contract with credit card processors to perform these tasks, or will provide a list of companies for you to select.

You will generally pay a per-transaction fee for each charge (between 20 and 60 cents), a discount rate (another fee) that is some percentage (2% to 4%) of the total amount charged by credit card, and various initial set-up fees for services, equipment, and software (ranging from $200 to $1,500).

A bank versus an ISO: Deciding which one is best for you depends on the nature of your business, your credit rating, and your potential for profitability. Banks generally charge lower fees than ISO's, but banks are often hesitant to open merchant accounts for new businesses, small businesses, home-based businesses, or risky businesses (read: anything involving the Internet) because they must believe they can collect any chargebacks from you.

A chargeback is a returned product or challenge against the amount charged on a credit card. Banks most often put a hold on funds until the dispute is resolved. Say a client pays you $500 by credit card and the amount is transferred to your merchant account. Later the client isn't happy with the service and disputes that charge with the issuing bank, which puts the amount on hold. If you've already spent that money, you may owe your bank $500; it's "charged back" against your account until the dispute is settled.

Service providers in particular find this situation problematic since it's difficult to objectively determine whether a service was provided as promised. Small businesses also have it rough because each delayed payment may represent that month's rent or utility bill. The bank demands proof from you through some report or contract that you provided the promised service. You must also pay a chargeback fee to your bank, which may run from $10 to $25 per chargeback. If you have a lot of chargebacks, the bank could cancel your account and add the name of your business to a list that it shares with other banks, which will prevent you from opening a merchant account with anyone else; you will be effectively blacklisted. This collection process may be too risky for your long-term business goals if your business lends itself to easy dispute.

If your business is determined to be too risky by a bank and your application for a merchant account is denied, try an ISO. They charge higher rates because they accept some of the responsibility for chargebacks. They apply for a merchant account with acquiring banks on your behalf, and charge you a fee for the risk that they take on. If you go through an ISO, most experts recommend that the merchant account be in your name rather than the ISOs. Some shady companies "factor" or "launder" accounts for high-risk merchants in violation of credit card association agreements (and in violation of law in some places), charge exorbitant fees, and make it difficult for you to access your money.

Compare the providers

Before you sign up with anyone, you must compare the services, fees, and policies of each organization. Do they provide equipment? Will their software require modification to your Web site? Do they provide instant verification and online processing? Can you get telephone verification if you don't want to accept information online? Do they have a seal of approval by a reputable business organization?

Beware of hidden fees for items such as installation, minimum account billing, voice authorization, bank setup and daily closeout. Get a schedule of all fees and make sure you understand when and how they may increase, and under what circumstances new fees may be charged. You must understand policies regarding chargebacks, confidentiality, raising fees, providing notice of changes to fees and other terms, and when your account may be cancelled.

For example, beware of agreements that require you to pay "fines" in addition to chargeback fees when the percentage of chargebacks exceeds a certain amount of your total sales volume. Be wary of signing on with an organization that sells your information, and that of your customers, to other companies unless you understand exactly what information they're using and where it's going. Estimate your cost by making sure the agreement doesn't allow the organization to change fees or terms without providing written notice to you of the change. What are some concrete things people should look for in these policies? In other words, what's good and bad? Just pointing out the parts of the policies isn't enough.

The web sites of credit card associations, such as those of Visa and MasterCard, are a good places to start gathering more information.