Credit Card Processing Blog

Another huge bank is teaming up with a giant credit card company to test a contactless payment system. This time it is the turn of Bank of America, the largest U.S. consumer bank, and Visa, the largest card payment network in the world, to unveil a program that would make it possible for customers to pay by waving their phones by a specially equipped point-of-sale (POS) terminal.

The test will begin in September in the New York area and will last through the end of the year. Visa also plans a similar test program with U.S. Bancorp, beginning in October.

Visa will supply participants in the test with small chips that would be attached to their cell phones and transmit transaction data to the merchant’s terminal. Although technical details were not released, it is likely that the chips will use near-field communication (NFC) frequency to communicate with the merchant’s POS device. The NFC frequency allows data transmission within a range of less than 20 cm (8 in), which limits the risk exposure to threats from hackers.

Once a user waves his chip-equipped phone by a participating merchant’s POS device, his account information will be transmitted first to Visa and from there to Bank of America for authorization. Then the transaction will be processed just as any other card payment. Upon approval, a receipt will be printed out for the cardholder to complete the transaction.

Contactless cell phone payments have been in use in Japan and South Korea for years, but they never made any headway in the U.S. This is certain to change, however, with most mobile phone carriers and major banks developing their systems.

Only a couple of weeks ago three major carriers – Verizon, AT&T and T-Mobile – announced they were teaming up with fourth-biggest U.S. card payment processor Discover and British Barclays Bank to develop their own contactless payment service, using NFC technology.

Earlier this year, Starbucks expanded its own iPhone mobile payment service, also using NFC technology, from 16 West Coast stores to more than 1,000 locations nationwide.

So it is clear that the U.S. is finally on its way to joining Japan and Korea in adopting the mobile payments technology and at the rate smart phones are evolving, we are likely to see much more innovations in a fairly short order. The day when most cardholders will have their credit card information stored in their phones, rather than in a piece of plastic, is probably just a few years away.

Yet, for all their convenience, mobile payments will not transform the credit card industry. Cell phones will simply become another tool for facilitating credit card payments, cooler than POS terminals, but performing the same functions. More importantly, transaction fees, paid by merchants for each card payment they accept, will either remain the same or increase. NFC-transmitted payments will initially be classified as “card-present” transactions, giving them the lowest processing rates, because cardholders will be signing physical receipts. That puts them on par with POS terminal-processed payments. However, if it turns out that mobile payments are more prone to fraud or chargebacks, Visa, MasterCard and the credit card companies are sure to revise this classification.

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So you are finally ready to open the doors of your new business and let your customers in. But wait, you haven’t yet set up a merchant account to accept credit card payments. You left it for the last minute, because it is not as important as all these other decisions you had to make to get the whole thing off the ground and off to the races. But now is the last minute, so how do you go about it? This article will hopefully point you in the right direction and help you make a decision you will feel comfortable with.

There are many merchant account providers out there and selecting the one that will offer the best solution to your needs can be challenging, especially if you don’t have enough information. There are several factors to consider in your selection process. Typically, most inquiries that we receive are focused solely on our pricing. Pricing is very important, perhaps the most important factor to consider, so let’s go over it first. Your cost for accepting credit card payments will consist of several components and you will need to know exactly how much you will be paying for each one of them:

• Discount rate – the amount a merchant is charged by the payment processor for each credit card transaction. It consists of a percentage fee (e.g. 2.25%) and a fixed, per transaction, charge (e.g. $0.25). For an internet or direct marketing merchant account, your discount should be no more than 2.20% + $0.25 per transaction. For retail accounts, it should be no more than 1.70% + $0.25 per transaction.

  
  It should be emphasized that there are several types of pricing models and you should first decide which one you will go with. We have discussed in detail the differences between the two main pricing structures – interchange plus pricing and tiered pricing – in a separate article.

• Authorization fee – another per-transaction fee. Authorization is the process by which a card issuer approves or declines a payment card transaction. You should not pay more than $0.10 for any type.
• Application and set up fee – one-time fees to apply for and set up your merchant account. You should not pay any set up or application fees!
• Monthly statement fee – as the name suggests, it is charged monthly to keep your account on file. You should not be paying more than $10.
• Support fee – another monthly fee, charged for customer service. You should not pay such a fee.
• Monthly minimum fee – stipulates the minimum amount that your processor will want to make from processing fees each month. So if your monthly minimum is $30 and you generate $20 in processing fees in a given month, your processor will charge you additional $10 ($30 – $20). Typically, monthly minimums are set to discourage applicants from setting up merchant accounts that they don’t really need.
• Payment gateway fee – specific to the e-commerce industry. Payment gateway is the service that connects an e-commerce website with the merchant’s processing bank and transmits transaction information between them. You will only need it if you want to let customers pay you over the web and it should not cost you more than $15 per month. Some gateway providers may charge you a set-up fee, which varies by provider and gateway, but should not exceed $50.

If you see any other charges in the proposed pricing agreement, you will be well advised to look elsewhere. Also if you are looking for a merchant account to replace your existing service, ask your prospective processor to provide you with a pricing comparison table to make your choice a better informed one. Make sure you check the math, though!

While pricing is important, it is not the only factor you should evaluate. You should also examine your prospective processor’s:

• Experience – you will need to be careful here. On the one hand, you will want to be sure that your processor will have the expertise to get the job done. On the other hand, however, many well established processors offer substantially higher rates, justifying it exactly with their long record and the piece of mine that it brings you. You should not be overpaying just because they’ve been in business for a while!
• Customer service – you will want to make sure that you will be getting knowledgeable support when you need it, because you will need it. You may want to contact a couple of your prospective processor’s existing merchants and ask about their satisfaction with the customer service they are getting. Many processors now offer 24 / 7 customer service.
• Chargeback management – chargebacks result when a cardholder disputes a transaction or when the merchant does not follow proper card acceptance procedures. They can be costly and time consuming. In extreme cases, if you cannot keep them under control, you may even lose your merchant account. You will want to make sure that your prospective processor has the expertise to help you reduce the level of chargeback-generating disputes and to implement adequate payment processing procedures. We have developed our Payment Card Acceptance Best Practices Guide to help you in that.
• Fraud prevention – your processor must be able to help you fight fraud! You will need all the help you can get to minimize fraudulent transactions, especially if yours is an e-commerce business. Make sure that your prospective processor supports Verified by Visa, MasterCard SecureCode, the Address Verification Service (AVS) and the Card Security Codes (CVV2, CVC 2 and CID).

It is important that you don’t cut corners during your due diligence process. The right processor will show you how to reduce processing costs and minimize chargebacks. You should go beyond looking at the prominently advertised processing rates, as often they don’t mean much or are totally misleading.

Travel agencies are among the highest-risk merchants, as far as credit card processors are concerned. The reason is that historical data show that consumers are much more likely to dispute and charge back travel agency transactions than most others. To give you an idea of how the payment card industry views travel agencies, consider the fact that travel agencies are placed in the same risk group with merchants selling adult products, escort and companion services, fortune tellers, diet programs with guaranteed results and sports forecasting or odds making. The consequence of this policy is that new travel agencies find it extremely difficult to set up a merchant account, as most processors require prior credit card processing experience to show them that the applicant can manage risk sufficiently well to keep customer disputes and chargebacks within reasonable limits. Established travel agencies are closely monitored to ensure that they too remain focused on managing risk.

So what should you do, whether you have just started your travel agency or have been in business for years to mitigate credit card processing risk?

Firstly, before you even apply for a merchant account, you will need to understand the potential sales agent liability associated with selling air fares online. Understanding your risk exposure will help you take adequate steps to minimize it and protect your travel agency from losses associated with chargebacks resulting from customer disputes and fraudulent transactions. As a sales agent of an airline, for example, your travel agency may be liable for the entire amount of an airline ticket, if it is successfully disputed by a customer or if it was purchased with a stolen credit card. To mitigate your risk, you will need to set up card acceptance policies and procedures to address the following issues:

• An authorization request that is approved by an issuer indicates that the credit card account is in good standing. However, the authorization approval is not a proof that the legitimate cardholder is making the purchase, nor is it a guarantee of payment. Be advised that, in most cases, airlines are liable for fraudulent card-not-present transactions, even when they were approved by the card issuer.
• As a travel agency, your organization may not necessarily be a Visa or MasterCard merchant, subject to the Credit Card Associations’ rules and regulations. However, the airline is a Visa and MasterCard merchant and it is subject to their rules and regulations. Be advised that, in most fraud-related transactions, the airline transfers financial liability to the travel agency it has partnered with as part of the contractual agreement. In such cases your organization will bear the full financial responsibility.

When selecting a payment processor, be sure to choose one with experience in working with travel agencies and other high risk merchants. Your processor must be able to assist you in developing and implementing your fraud-prevention procedures and be proactive in identifying and correcting potential weak spots in your processing cycle. It is true that at first you may not have much of a choice when applying for a merchant account, as most U.S. processors will not accept a new travel agency under any circumstances. Once you establish yourself, however, you will have much more leverage. Typically, processors will request that established high risk merchants provide processing statements for the latest six months of operations. If your statements show that you have managed to keep chargebacks down, most processors will be willing to work with you and you will have the choices you were initially denied.

Credit history is a determining factor when lenders make a decision on a personal credit application, whether it is for a credit card, a personal loan or a real estate mortgage. The information your personal credit file contains tells creditors how creditworthy you are, i.e. how likely you are to repay the loan. But how does a personal credit history affect a merchant account application?

Before we answer this question, let’s first take a look at the list of documents that are required from applicants for merchant accounts. The list may be different for each applicant, depending on the way the business is organized, the type of merchant account that is needed and other factors. Certain items, however, are always required, in order to help payment processing companies to evaluate the credit worthiness of both the business and its principals. Typically, applicants will be required to provide one or more of the following documents:

• Most recent tax returns (business and personal).
• Most recent personal and business financial statements.
• Most recent bank statements.
• Fictitious name statement (for DBAs).
• Partnership Agreement (for Partnerships).
• Articles of Incorporation (for Corporations).
• Dun and Bradstreet or other third party agency report showing the same legal name and address as the applicant along with a description of their location / facilities.
• IRS Confirmation of Non Profit Status – 501(c)(3) status – or other supporting documentation (for Non Profit Organizations).
• Government Entities must submit a Request for Approval of Proposal to do Standardized Government Business on Form “A”.

For new organizations, or if the business is a sole proprietorship, the principals’ tax returns are typically requested as a substitute to the financial statements. Additionally, unless the applicant business is a publicly traded company, the principals are required to provide their social security numbers, so that the processor may pull up their credit files from one of the major credit reporting agencies.

In order to understand why processors go into such great lengths to ensure that their prospective merchants handle credit in a responsible fashion, we need to first understand exactly what a merchant account is, from the processor’s perspective.

As far as merchants are concerned, a merchant account is a service that enables them to accept their customers’ credit card payments and then to have their money deposited into the merchants’ bank accounts, after the processor subtracts the transaction processing fees. At first glance, it looks like the processor is not taking much of a risk. After all, the merchant only gets its money after the processor gets it processing fee. So why are processors so cautious?

From a processor’s standpoint, a merchant account is a form of credit. When merchants accept credit or debit card payments, these payments are authorized by the card issuer and settled by the processor. While the processor does get its transaction fees before the merchant gets its money, the processor is also fully liable for the transaction amount, in case of a fraud or a chargeback. While any fees resulting from fraud and chargebacks are typically passed on to the merchant, if the merchant becomes insolvent or goes out of business, the processor must cover all such expenses. To further complicate matters, transactions can be charged back for up to six months after the transaction date, which leaves plenty of room for unforeseen events to take place. Moreover, in case of a fraud, in addition to the financial responsibility, the processor may also face legal challenges.

Personal credit history is just one of the factors that influence a processor’s decision when reviewing a merchant account application. Typically, it will only be an issue if there are many derogatory items in the credit file, especially if it shows a bankruptcy. For most applicants, however, an average credit score will be sufficient to pass the test.

Chargebacks are the single biggest factor why e-commerce businesses get into trouble with their merchant accounts. Visa and MasterCard have both set a limit of 1 percent on the number of charged-back transactions, in relation to the total number of transactions processed each month. In reality, payment processors will usually suspend a merchant account long before the chargeback ratio reaches 1 percent, because they are fined substantial sums by the Associations for each merchant designated as an excessive chargeback merchant.

Merchants must constantly work on improving their chargeback prevention procedures and pay special attention to invalid chargebacks, which are charged-back transactions for which the merchant is not responsible. To help merchants out in their efforts to eliminate frivolous customer disputes and invalid chargebacks, Visa and MasterCard have developed chargeback verification systems that significantly reduce chargeback levels and greatly improve the chargeback process.

When Visa or MasterCard detect an invalid chargeback, they automatically return it to the card issuer that originated it, and the merchant and its payment processor will never see it. Many processors have also established systems that routinely review exception items, allowing them to resolve issues before a chargeback is necessary. Together, these systems ensure that the chargebacks that you receive are legitimate or that only you can respond to them.

Yet, chargebacks are not always caused by fraud or processing errors or otherwise caused by an inadequacy in the merchant’s sales processing procedures. In many instances customers try to game the system by charging back legitimate transactions for which they are fully responsible. Unfortunately, they often succeed. So, even though chargeback verification systems are becoming increasingly more sophisticated and reliable, chances are that an invalid chargeback or two will often manage to find their way around them and into your payment processing statement. Moreover, a chargeback may be cleared by the verification systems, because it meets their requirements, and still be invalid. In these cases you should follow through as quickly as possible and represent your supporting evidence to your merchant processing provider as a proof that the charges were valid.

Although invalid chargebacks cannot be completely eliminated, you can significantly reduce their number by developing and implementing a set of best practices.

• Make sure that the way you accept and process orders and electronic payments is compliant with Visa and MasterCard regulations that were established exactly to help you fight chargebacks and downgrades (the practice of processing non-compliant transactions at rates that are higher than your qualified rates).
• Ensure that your processor is sufficiently competent. If all of your efforts to contain invalid chargebacks and the assistance that you have received from your processor have not produced the desired effect and the levels of invalid chargebacks remain consistently high, it may be possible that your processor simply lacks the expertise to address the issue and your best option may be to switch to another service provider.
• Do your due diligence when researching your prospective processor and consider all aspects of their services, not just the processing fees. Contact merchants who are currently using your prospect’s processing services and ask how well their processor is managing their chargebacks, exception items and re-presentments. Find out how sophisticated the processor’s reporting system is and ask to see a demo.

Remember that the right processing partner will help you process card transactions in compliance with Visa and MasterCard regulations and manage chargebacks successfully, which will save you money and help grow your business.