The Bewildering World of Credit Card Processing

Jennielle asks:

It's Jennielle again...thank you for reviewing my ASP's SSL charges...I sincerely appreciate it.

Do you think you could check out this merchant account fees, etc. I need a merchant account where I can accept CC payments online AND in person. If I read the terms correctly, they do offer equipment in order to accept CC's in person....

And do you think the fees are fair?

https://www.e-onlinedata.com/lunarpages

First of all, if you haven't read it yet, check out the cheat sheet for payment processing and general e-commerce terms and definitions to get a background on the way payments work. Jennielle is asking a question that really falls outside the purview of both those documents, however, which is: How do I choose a credit card processor for my business?

I recommend that you visit this page for a full explanation of all the parties involved in credit card processing and how to choose the service. Credit card processing is basically a very sales-intensive business; once you select a processor, they take a cut of every transaction, and their incentive to sell you anything new or even perform basic service is very small, because the pain of switching to another processor can be fairly high. That also means that, initially, you should compare vendors carefully because their rates can be very competitive.

The most basic form of credit card processing is a machine you have in your retail location and swipe customer cards when they come in to buy goods. At this level, you are looking at a discount fee (from which everyone involved in the transaction, including the processor, the issuing bank, and even the organizations that sold you your machine and merchant account, take a cut) and probably a statement fee for sending you a paper statement every month. Expect about 1.6 - 2 percent for discount fees (American Express is much higher, often above 3%) and a few bucks a month for the statements. If you take someone's order without swiping their card – over the phone, for instance – that's called a "card not present" transaction and often fetches a slightly higer fee.

When you process cards online, there are additional fees involved. A gateway is a service that acts as a virtual credit card machine for your website, authorizing the cards and processing the transactions in real time. A gateway often adds substantially to your processing expense; there are setup fees ($50 - $200), annual fees, and transaction fees (often with monthly minimums) that are usually expressed in fixed dollar amounts or percentages. The payment processing article explains most of this in detail.

So, back to the advice part: I can't recommend a single payment processing/merchant account vendor, but the one that Jennielle sent looked a little pricey to me. There may be a reason for this; there are a host of merchant services providers that cater to very small or new businesses that lack adequate credit history to establish a merchant account through a bank. Because a new merchant can set up a business and quickly ring up thousands of dollars in fraudulent transactions (leaving the bank holding the bag), new merchant account applications are vetted very carefully. By choosing a provider that guarantees a higher approval rate or other possible benefits for the account approval process, you may be trading money for a less painful process.

My advice? Start with your bank. A good banking relationship is essential for any small business, and as tempting as it is to start up flying by the seat of your pants (believe me, I've done it – more than a few times), fundamentals like finding a bank and getting a decent lawyer can save you enormous time and frustration later on. A bank with a business checking department will either have a merchant services division or be able to recommend one.

Once you have their recommendation and their pricing, go shop around – you will certainly find better deals, but make sure they have good service. Call them up and see if you can contact a human being. Many of these organizations are, as I mentioned before, little more than sales departments pushing deals every day. If you are going to select a company that also processes online transactions (that is, a turnkey merchant service, including the gateway) make sure you can track down a human being – you'll have a problem sooner or later, and when you have a problem with your customers' money, you need to get it fixed quickly.

Last, if you are using a hosting company or ASP, they may already have a gateway and or merchant provider that they recommend. This may indicate that their software works better with that particular service, but it just as likely means they are getting a commission for the referral and have little connection to the provider otherwise. Read carefully, and call or email them if you're not sure. All things being equal, most of these systems work fairly simply and plug in to your website or shopping cart without a lot of headache, so you can pick on price and convenience if that's what you prefer. Just don't forget about support; skimp on it now and you'll feel pain sooner or later.