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What You Should Know about Accepting Credit Cards at Your Small Business
Posted by Sylvia Lagerquist, CPA
The credit card payment processing system in the United States is one of the true modern marvels of our economy. Customers can instantly pay for any number of products and services, whether they are in person, online, over the phone, or on the go.
Small businesses and large enterprises alike can serve the widest range of customers through a system that, while far from perfect, still allows millions of purchase transactions to happen almost seamlessly every single day. In addition, more and more consumers are becoming accustomed to carrying cards only (or, for some, carrying virtual cards in their smartphones).
As a result of these realities, it is increasingly imperative for small business to accept and process credit card transactions if they are to remain competitive. However, there is a lot to consider if you are make the transition smoothly. Here are five key points to keep in mind:
1. Choose your merchant partner carefully.
In order to accept credit cards, you are going to need to partner with a financial services provider that can process your transactions. This means paying a portion of each charge to a third-party service who provides you with access to the network and processes the payments for you.
The key to selecting the right partner begins with carefully analyzing the nature of your customers, transactions and overall volume and value of credit card activity.
Some processors charge setup fees and then charge you a percentage of each transaction. Others charge you a flat per-transaction processing fee. Still others have a combination of fee components involved, but may charge little to nothing at the setup stage. Since a percentage of each transaction can become a very different amount vs. a flat fee per transaction, you need to understand your business very well.
Are you processing 1,000 transactions a month that average $5.00 or less? That is very different than a business that processes 5 transactions per month that are worth $1,000 per transaction or more. The total dollars processed may be the same, but the similarity ends there.
2. Know the differences between processors and aggregators.
Traditionally, credit card services have been handled through merchant accounts provided by established credit card payment processing services. However, in recent years a second category of providers has developed — merchant account aggregators.
Account aggregators include some of the most popular small business credit card servicing providers, such as Square, PayPal, Intuit GoPayment and Stripe. They do not actually process transactions themselves, however, and therein lies an important distinction.
Established processors use a procedure similar to loan underwriting in order to evaluate your business before they will accept you. They want to know what level of risk you pose for the potential of chargebacks, fraud, mismanagement of customer payment information, or whether your business might close up shop tomorrow. Once they are comfortable with your business and its risk profile, they will offer you a merchant account.
The account aggregators operate on a completely different model. They offer you the advantage of instant access (you can literally purchase the Square card reader at a nearby Staples store for $10.00 and be accepting credit cards minutes later).
The aggregators do this because they bundle your transactions with those of every other user in their network, and run them all through one merchant account (theirs). That account, in turn, is still managed by a traditional processor, with all of the associated fees and controls in place.
Aggregators offer convenience, and for low-volume users it can be cost-effective. However, if you process a high volume of transactions or a lot of high-dollar transactions, the percentage-based fees typical of aggregators can become very expensive.
There is another risk with aggregators that some small businesses never experience, and others become paralyzed by. In order to balance their own risk profile by ‘vouching’ for thousands of individual businesses, the aggregators will sometimes hold your funds or close your account without warning.
It should be noted that this can happen with traditional merchant account processors as well, but the likelihood of such an event happening should be much lower when you are (a) operating under your own merchant account, and (b) working within a risk profile that the account provider knows is specific to your business — both of which are not possible with the “instant-on” scenario provided by the aggregators.
3. Understand the risks of accepting credit cards.
We just discussed some of the risks of accepting credit cards during our discussion of providers, but there are yet more challenges to consider.
One is that your business can be subjected to chargebacks in most cases up to six months after the point at which a purchase was made. Customer disputes and complaints often result in penalties to the merchant, since credit card providers are eager to provide consumers with a high level of perceived protection and safety.
There are other risks to consider as well. For example, if you execute recurring charges for clients, you may collect credit card information forms. If you lose them or if they are kept in an unsecured location (either on paper or digitally) and they are compromised, your business could be at risk for some or all of the costs of any associated fraud.
In addition, you should also keep in mind that not all credit cards work in exactly the same way. For example, while Visa and MasterCard are payment card networks, cards bearing their logo could be actual credit cards, or they could be debit cards. This increases the risk to you if your business accepts a card today for payments the customer will make tomorrow, since debit cards don’t guarantee the availability of funds to the merchant.
For example, if you run a small bed & breakfast, you might have the customer provide a payment card at check-in so that you can charge them for their stay at check-out. However, debit cards tie directly to a customer’s bank account and could end up with insufficient funds available, and your recourse would be limited. This is one reason why some merchants refuse to accept debit cards altogether, and others have a policy of placing a ‘hold’ on the card up-front for an estimated amount, so as to protect the merchant’s exposure later.
Another factor is the differences between Visa and MasterCard credit cards, and the American Express (AmEx) card. If you are in the travel industry or if you sell to other businesses, chances are you will come across AmEx. Whereas typical credit cards are essentially revolving loan accounts that provide financing against any ongoing balance, traditional AmEx accounts are actually member payment accounts designed to be paid off each month. AmEx often charges higher processing fees, and they can be particularly hard on merchants when a dispute or disagreement with a customer arises.
4. Distinguish between the kinds of transactions as well.
Another factor to evaluate is the kinds of transactions you will process, and where you will process them. All payment transactions are organized into two primary categories:
• Card Present
• Card Not Present
The latter includes any situation in which the customer does not personally present the card to you for payment, so therefore you should typically consider all phone sales, internet sales and scheduled payments (where a customer provides payment information to you at one point and then you process charges against that information over time), as Card Not Present transactions.
The latter are viewed as higher-risk, of course, since there is no verification step involved. One can argue over whether in-person card presentation is really any more secure than card-not-present payment (many security experts would say they are not), but nonetheless, the payment processing providers view them differently. In most cases, you will pay more to process Card Not Present transactions vs. processing Card Present ones.
In addition, if you accept credit cards over the internet or through other customer self-administered means (such as payment within an app), you need to decide whether you are going to process the transactions yourself using your own eCommerce software, or use a third-party payment gateway service that will perform the actual processing for you. These are, again, very different processes with different risks, benefits and costs associated with them, so research your options carefully.
5. Understand your responsibilities as a merchant.
When you accept credit cards, you join a global system that provides rapid, high-quality service but that is also constantly under threat of fraud, hacking and other forms of attack, abuse and malfeasance. That means that as a merchant who accepts credit cards, you take on significant responsibilities, that not following proper procedures can leave your business facing unanticipated liabilities.
For example, many retail employees will ask a customer to read them the CVV number on the back of a credit card, rather than insisting that the customer hand the card to them or display the back directly, allowing them to verify the accuracy of the information. This places the security of every transaction at risk, as it directly undermines a key element in the card security process.
In addition, merchants are responsible for following the payment security standards established by the PCI Security Standards Council. Your credit card provider may audit your business to ensure compliance, and if they find you not in compliance, they may freeze your ability to process further transactions and ultimately close your account due to a failed security audit.
Another factor emerging today is the use of new forms of payment, including smartphone apps and embedded chip cards. Most merchants are being transitioned to new point-of-sale (POS) terminals during 2016 that allow them to accept EMV chip cards. In the future, it will be required that chip cards only be accepted through the use of chip readers, so again you need to consider this change when you select partners and systems to support your credit card acceptance efforts.
As you can see, accepting credit cards can offer enormous benefits to your business, but it also comes with a set of major decisions, considerable responsibilities and serious risks that you should be aware of up front. This article only explores some of the key considerations. Make sure to consult with your CPA and your business banker as you evaluate and select the best strategies and options for accepting credit cards at your small business.
- Card Payments for Small Businesses
- Can my small business accept credit card payments?
- About interchange-based merchant account rates and pricing
- How to Choose Between PayPal vs Stripe vs Merchant Accounts
- Best Credit Card Processors for 2016
- Visa, AmEx, MasterCard, Discover — What’s the difference?
- Payment Security Educational Resources
- What Merchants Need to Know About EMV
Image Credit: ptmoney (Flickr @ Creative Commons)
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