Unraveling the Mysteries of Merchant Credit Card Accounts for Web Commerce

by Dr. Ralph F. Wilson
Web Commerce Today, Issue 1, August 15, 1997

ACCEPTING CREDIT CARDS over the Internet requires putting a number of separate pieces together. What I've tried to do here is explain in simple terms what those pieces are and describe how you can do this.

These are the pieces:

• A bank that issues to you a merchant credit card account
• A transaction clearinghouse designated by your bank
• Hardware or software gateway to the clearinghouse
• A merchant credit card broker (optional)
• (Security is vital, but beyond the scope of this article)

Let me describe how each of these pieces plays a part. You probably know much of this, but bear with me as I explain each of these pieces in turn.

Bank

A bank or other financial institution is required to set up a Visa or MasterCard merchant credit card account for you.^{[Note 1]} Ideally, this is your own bank, where you already have a checking account. Banks don't let you forget that they are taking a risk with you. If, for example, you failed to deliver the product or service paid for with a credit card, they would be responsible for making it good. Of course, they are getting paid enough to cover this risk, the processing charges, but they check you out pretty carefully before issuing you an account. Assuming that you have decent credit, they will help you set up an account.

I was fortunate. My bank was already conducting online banking and is comfortable with the Internet. But exercising due diligence, I asked my credit union if they offered merchant accounts, and was given the phone number of a company that performed that service for them. "Yes, we can help you with a merchant credit card account," the lady answered cheerfully. But when I mentioned the Internet the climate changed. "Oh, we don't allow credit cards taken over the Internet," she muttered, somewhat taken aback. Then she recovered somewhat: "Maybe we should, and maybe we will in the future, but for now we don't offer that."

So what do you do if your bank or financial institution won't set up an account that allows you to take credit card information over the Internet? You go to a broker.

Merchant Credit Card Broker

You don't have to look long on Yahoo to find that there are many, many people who want to help you set up an account -- for a fee. Some of these people are very reputable, some are shysters. In industry parlance these are called Independent Sales Organizations (ISOs). Make sure you check them out before you plunk down your money. Brokers aren't an essential part of your online transactions, they only set you up with a bank and then step out of the picture. They make their money in one or more ways: a finder's fee from a bank (which you might see in the form of an application fee, a percentage of the hefty fees you'll pay for a card-swipe machine or PC software, and perhaps an up-front fee). They will place you with a bank that is able to take someone with your credit history, and that is comfortable with Internet transactions.

Transaction Processing Clearinghouse

When you finally get set up with a bank you'll find that they probably contract out processing the credit card transactions to a transaction clearinghouse. When you get ready to process the purchase made on your online (or physical) store, they're the people at the end of the modem who tell you the credit card number is valid and doesn't have its credit limit maxed out. We'll explain more a bit later. You don't usually pay the transaction clearinghouse directly (though they may deduct bank fees and make net deposits), but you'll have a lot of interaction with them. Examples: First Data Corp. and First USA.

Hardware/Software Gateway to the Clearinghouse

The final piece is a gateway that connects you to this transaction clearinghouse. Nearly gone are the days of paper processing, nearly everything is electronic now. There are three common gateways:

Cardswipe machines. Next to nearly every cash register in the country reclines one of those gray flat boxes that the clerk swipes your card through (and sometimes wipes it off and swipes it through again). Then she enters the amount of the transaction and waits. Thumbs twiddle. A few seconds later her terminal lights up with an authorization code which is printed on your credit card transaction slip. That authorization comes from the credit card clearinghouse that the store's bank contracts with, and it effectively assures payment to the merchant when the customer signs on the dotted line and the purchase is made. Examples: VeriFone Tranz, etc. But these machines aren't too helpful for Internet businesses, where you don't have the customer's card to swipe; you'd have to get pretty good with the keypad. Fortunately, there are some other options.

Desktop Software. Many businesses don't ever see the customer's credit card. They get the credit card number over the phone, via mail, or over the Internet. Every day or two, the merchant enters the credit card numbers and transaction amounts in special software, and transmits that list over a modem to the clearinghouse designated by the bank. In a short time, the clearinghouse responds with a list of "good" cards, and a list of "bad" ones. The merchant then sends a message back to accept the transactions for good cards, and frets about merchandise that went out the door with a "bad" card. Of course, if you're wise you just don't ship until you've run the credit card transactions. Examples: ICVerify, PCAuthorize, MacAuthorize. This solution works all right unless you have a large volume of orders. It also requires you to rekey data from each order into your computer, which can get time-consuming, and introduce errors.

Real-time Website Gateways. Finally, there are several sources of gateways to the processing clearinghouse which can check the customer's credit card while he's still online. In some cases the gateway requires a special set-up by your Internet Service Provider (CyberCash); others employ Internet connections to a service bureau gateway. These various gateways provide a bridge from your website to a completely different modem channel to check the credit card in real-time, a rather complex procedure if you were to try to do this yourself from scratch. However, several of these gateways are pretty easy to get set up. Beware: while standard HTML forms can accommodate such a gateway, not all shopping cart programs can do so. Therefore, if you wish to use a real-time gateway, make sure all the pieces fit before you purchase. Examples: Anacom Merchant Services SecurePay, Online Analysis SocketLinks, CyberCash, VeriFone vPOS, and others.

Costs

How much does all this cost? That all depends. You can save a good bit of money by careful shopping. A couple of rules of thumb: assuming you have decent credit yourself, your bank can probably give you the best deal. When you go through a broker, you've just introduced another person who needs to be compensated, and you might end up paying a higher rate to a bank that doesn't know you well already. However, a good reliable broker may just save you a lot of time shopping and putting some of the pieces together, especially if your own bank isn't Internet-savvy.

In the table below we outline some ballpark costs that you may encounter. In any given situation you may not have to pay all of these charges. Sometimes, for example, parties will be making their money selling you hardware or software, in others they may just charge some set-up fees. In any case, look at the whole picture before you sign a contract.

Fee	Paid To	Explanation	Amount
Discount rate	Bank	Over time, this is the most expensive aspect of taking credit cards. Try for the lowest rate possible. Rates depend upon your annual sales volume and your average transaction amount. The higher these are, the lower the rate. For example, with an annual sales volume over $30,000, my bank charges 2.78% for average tickets in the range of $40 to $50 taken over the Internet	1.5% to 5%
Minimum monthly processing fee	Bank	If the bank's 1.5% to 5% slice of purchases doesn't add up to the minimum each month, they charge you the minimum anyway.	$15 to $30
Transaction Fee	Bank and/or Gateway	The moral of this story is, try not to accept credit cards for tiny purchases. Visa and MasterCard are least expensive. Sometimes American Express, Discover, Diners, etc. require a higher transaction fee.	15 to 30 cents per transaction
Application Fee	Bank or broker	Sometimes this can be pretty high. Sometimes there is no charge. Shop around.	None to $500
Set-Up Fees	Bank or broker	Vary greatly	$30 to $300
Gateway Hardware or software	Bank, broker, or gateway	Banks and brokers make money reselling or leasing cardswipe terminals, PC verification software, or real-time Internet verification systems. You may sometimes purchase these from the source or third parties. Shop around.	$350 to $995
Supplies	Bank or gateway	These are sometimes included in the cardswipe terminal rentals.	Free or fee
Internet Gateway set-up	Webstore designer or webmaster	To get real-time credit card authorization on your Web site, expect to pay your webstore designer to compensate for the extra time it will take to install the gateway.	Varies
Monthly processing fee	Internet gateway	The gateway company may charge you a flat monthly fee to process your credit cards, in addition to a per transaction fee.	$40 per month

What does it cost to set up? Figure on spending $500 to $1,500 and you'll be in the right ballpark. You'll need to set up the merchant credit card account yourself, so shop around. Also, look for a webstore designer or webmaster who can guide you in choosing a gateway that is compatible with your purchasing system (e.g., shopping cart).

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Note 1. The bank generally gets you set up to accept only Visa and MasterCard. If you want to accept American Express, Discover, or others, you have to apply separately to each of those organizations and then coordinate with the processor to process their charges, too.

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