The number-one question on the minds of new website builders is, How do I arrange to accept credit cards for payments?

A good first place to start your search for merchant status is your own bank. Most issue credit cards, and if you have a long-term relationship, that's a big plus. Your bank says no? Try a few other local banks--offering to move all your accounts--and you just may be rewarded with merchant status.

You may also try other companies that specialize in issuing accounts to online merchants, including:

Or log onto Google and search for credit card processing. You'll find many dozens of outfits, large and small, that are on the prowl for startups seeking merchant accounts.

Credit cards aren't processed cheaply, however, at least not for a startup. A typical fee schedule for a small-volume account (fewer than 1,000 transactions monthly) would include startup fees amounting to around $200 and monthly processing fees of around $20.

Making Customers Feel Secure
The one must-have for online credit card processing: secure, encrypted connections. You've seen this many times yourself. Go to virtually any major e-tailer, commence a purchase, and you are put into a "secure server" environment, where transaction data is scrambled to provide a measure of safety against hackers. Truth is, these worries are generally unfounded--the odds of a hacker grabbing an unencrypted credit card number from a nonsecure website are pretty slender--but buyers feel reassured when they see they're entering a secure site, and that means you need to provide it.

Is this a technical hassle for you? It shouldn't be. Whatever vendor sells you credit card processing should also, as part of the package, provide a secure transaction environment. If they don't, look elsewhere.

Fraud Prevention Tools
Contrary to reports of rising fraud rates, credit card payments remain one of the safest payment methods available online. Sophisticated internet solutions, such as the LinkPoint Secure Payment Gateway, process credit card payments in real time using Secure Sockets Layer (SSL) technology, which encrypts all confidential information during the transmission and authorization of transactions.

Other fraud-prevention tools, such as the Address Verification Service (AVS), make online credit card acceptance even safer. The service compares the numerical information in your customers' addresses with records stored by card-issuing banks. It then returns codes that indicate whether the numbers match. Although the information provided by the AVS does not affect the authorization of your transactions, it can help you make informed decisions about suspicious orders.

Besides the AVS, you can protect yourself by using the card validation code 2 (CVC2) and the card verification value (CVV2) verification systems of MasterCard and Visa, respectively. These verification services use the three-digit codes printed on all MasterCard and Visa cards to help you determine whether your customers possess legitimate cards.

Special e-Considerations
Be sure to ask prospective processors about the costs of storefront solutions that you must have to effectively operate your website, such as shopping carts, Web hosting, payment gateways, virtual terminals, virtual checks, databases for fulfilling orders, customer tracking, and a way to calculate tax and shipping charges.

Accepting Payments

Typical Fees
Shop around for a credit card processor that best suits your needs. Talk to several different processors and don't be afraid to ask questions. Find out about:

  • The discount rate: The percentage of each transaction paid to the merchant account provider. If your monthly charges are less than a certain volume, the processor may charge a higher percentage.
  • Transaction fee: A flat rate charged for each transaction processed.
  • Equipment: Some examples include point-of-sale terminals, printers and peripherals. Also find out about installation costs. (This may or may not apply to you as an e-business.)
  • Monthly minimum fees: These are minimum fees that the merchant account provider collects each month from the merchant if the merchant's discount rate and transaction fees don't add up to the monthly minimum specified on the original merchant application. It is usually about $25 per month if the monthly minimum volume isn't reached.
  • Reserve fees: If your credit history is in question, or if you own a new or high-risk business, you may be required to set up a reserve account, which protects the processor from any future losses. The reserve account is calculated as a percentage of your sales.
  • Chargeback fees: These are the costs charged by a processor to cover disputed charges.

Other Payment Options

  • Money orders. For customers who don't have credit cards, money orders are a great payment alternative, particularly if you sell your products in an online auction environment, such as eBay. Services like BidPay.comallow your customers to purchase Western Union-branded money orders with their credit, debit or charge cards. BidPay.com then sends the money orders to you, along with e-mail notification that your customers' payments are on the way.
  • Existing checking accounts. Services that transfer checking account funds electronically are another quick and easy option for customers without credit cards. Western Union's MoneyZap service, for example, lets buyers pay merchants online from their existing checking accounts.
  • Check cards. Offline debit cards--aka check cards--are typically issued by large credit card companies through their participating banks. U.S. consumers today make the majority of their offline debit purchases with the Visa Check Card or MasterCard's MasterMoney card. These enhanced ATM cards carry the Visa and MasterCard logos, respectively, and may be used everywhere the credit cards are accepted, including over the internet.

Customers who make check card purchases in the physical world sign drafts that authorize merchants to charge their accounts. On the Web, customers enter check card information into browser-based forms, just as they would if they were making credit card purchases. The data is encrypted, captured by the transaction processor's secure payment gateway, and sent to the credit card processing networks for authorization. Transactions normally settle in two to three business days.

  • Electronic checks. These are another emerging e-payment option. Through a process called check conversion, brick-and-mortar merchants can transform their customers' paper checks into electronic transactions that are processed through the automated clearing house (ACH) network. Funds are automatically deposited into their merchant accounts, usually within 48 hours. To perform check conversions, a store owner must have an account with an electronic-check service provider as well as a magnetic-ink character recognition (MICR) check reader or a payment terminal that supports check conversion.
  • Internet checks. You can also accept checks over the internet using payment-processing software, such as LinkPoint International's VirtualCheck. Customers who elect to make check purchases from a website are prompted to key their information into a browser-based form. Again, data is encrypted and captured by the transaction processor's payment gateway. Funds from approved transactions are debited from customers' accounts and transferred via the ACH network into merchants' accounts in 10 to 14 days. Merchants can enjoy peace of mind as well as convenience if they use check-guarantee services when they process internet-checks.
  • PayPal. Based in Mountain View, California, PayPal is the world's largest online payment system. Recently acquired by eBay, PayPal lets consumers send money to anyone with an e-mail address through their credit card or checking account. Consumers sign up once for the free service-after that, they use their account number to buy products online securely, conveniently and cost-effectively. The cost-effectiveness of PayPal for e-tailers is demonstrated in several scenarios. For example, if entrepreneurs have sales of $250 per month, they pay a credit card company about 35 percent of every transaction, and if that number goes up to $7,500 per month, they only pay about 5 percent. But PayPall always charges 3.3 percent, says a Gartner vice president. It's also easy to use. A merchant adds PayPal's "Web Accept" button to its site; customers then click on the button and pay with their PayPal account. The payment is processed and sent directly to the merchant's account, then the customer is returned to the website.

Accepting Payments

Are You High Risk?
Just because some merchant account providers lump e-businesses in with other high-risk businesses, like telemarketers, merchants in the travel and cruise industries and internet auctions, it doesn't have to mean you won't be able to open a merchant account. It does mean, though, that it may be more challenging to set one up. Merchant account providers--banks and independent sales organizations--will also consider how long you've been in business, your credit history and any previous merchant accounts you've held with other processors.

Your length of time in business matters because merchant account providers want an assurance that you understand the business environment in which you operate, can identify the potential risks you face, know how to prevent or reduce fraud, and understand how to manage credit card acceptance. Regardless of risk, this kind of knowledge comes only with first-hand business experience.

Your credit report will show how well you've repaid past loans, and if you've had any liens, judgments or bankruptcies filed against you. A favorable credit history will go a long way toward establishing your credibility as a prospective merchant.

And if you've had an earlier, well-maintained merchant account, it's a positive indicator of how you're going to deal with your new processor. Terminated merchant accounts will show up on the Member Alert to Control High-Risk Merchants file, also known as the Combined Terminated Merchant File. If your previous processor terminated your merchant account because you defaulted on it, or if you incurred too many chargebacks, this may negatively impact opening a future account.

To increase your merchant account eligibility, follow these tips:

  • Ensure a positive credit rating. Remove any past bankruptcies, late payments or liens from your credit report before you apply for a merchant account. To obtain your credit report, contact a credit reporting bureau such as TRW or a company that provides merged credit reports from major reporting agencies, such as Equifax, Experian or Trans Union. Write to them, explain that these matters have been cleared up and ask that they're removed from your credit report. Whether you own a small or large business, having a good credit rating will make a lasting and favorable impression with a transaction processor.
  • Be honest about previous merchant accounts, bankruptcies, liens or judgments. By acknowledging past financial challenges, you improve your credibility and may encounter one less barrier to opening a new merchant account. You cannot hide information that's part of the public record.
  • Be willing to pay higher fees or accommodate special account requirements. If you need to abide by special restrictions or pay slightly higher fees in order to open a merchant account, by all means do it! It's worth it to provide your customers with as many noncash payment options as possible. It will help you generate revenues and stimulate impulse purchases.