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.

Accept card payments quickly and safely

Accept credit and debit card payments at the lowest processing costs. You will get:

• Free merchant account set-up.
• No fixed monthly fees.
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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 doing 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 provide the best solution for 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 the processing of 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 – sets 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.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).

Credit history is a determining factor when lenders make a decision on a personal credit application, whether it is for a credit card, personal loan or a 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.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).

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 one 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 processing bank 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.

Learn how to minimize chargebacks and fraud

Learn how to minimize chargebacks and reduce your processing costs. The Chargeback Management kit contains a video and an e-book:

• E-Book – Chargeback Manual (40 pages).
• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).

We are constantly reminded that the world keeps getting smaller and there are few industries where this is more evident than in the e-commerce. By default, web-based merchants have the world as their market and cross-border transactions are for many an everyday occurrence. With the global market, however, come global currency challenges that need to be well understood and adequately addressed to enable you to take full advantage of the opportunities. Let’s take a look at the choices that are available to you for accepting international payments and whether settling your funds in foreign currencies is a good idea.

Before we dive into the details, it is important to point out that Visa and MasterCard are global institutions and payment cards that bear the logo of either credit card association are accepted in every store or ATM that accepts that brand of cards. It does not matter where the card has been issued. What is different is the processing rate that merchants pay for accepting cards issued by foreign banks and this rate is higher, sometimes substantially higher. The same is true for the other global card brands, including American Express, JCB, etc.

Both Visa and MasterCard issuers can add surcharges on foreign transactions involving their cards. In the United States, currently Capital One is the only major issuer that has chosen not to do that and their Visa- and MasterCard-branded cards can be used abroad at no extra charge. The majority of issuers, however, do add a mark-up that can typically range between 0.50% – 1.00% per transaction, on top of the regular processing fees for the type of card used. Processors then pass this mark-up on to their merchants and can add a surcharge of their own.

If your business sells globally, you will have several options for settling your daily batches:

• Multi currency. With this option you can accept card payments and receive funds in several major currencies, typically North American, European and some Asian. This service could work for those of you whose customers are located mostly in the major world economies.
• Cross currency. With this option you can accept payments in a much greater number of world currencies, but the settlement will be done in a limited number (about a dozen or so) of major currencies. The benefits are that your customers will be able to pay you in their local currency and you will not have to deal with any foreign currency conversion.
• Local currency. With this option you can accept payments and receive funds only in your local currency. You can provide your customers with an estimate of the equivalent amount in the local currency, but it would be solely for information purposes. The local currency option would be best for those of you who would prefer to keep your operations and accounting simple and would rather not deal with foreign currencies at all. When a payment card transaction is authorized and cleared, your funds will be settled in U.S. dollars and you will be charged a conversion fee.

Once you select the option that would best address your requirements, you will need to make sure that you sign up with the right processor. It is important that, before setting up your merchant account, you check what your prospective processor’s conversion rates are. These rates may be different for MasterCard and Visa, as well as for debit and credit cards of the same brand. You may find that a provider that offers higher processing rates actually has the cheapest solution for your needs, because they don’t mark-up the conversion or cross-border fees charged by the issuers. American Express and Discover do their own processing and their rates are the same regardless of the processing bank, so you don’t have to worry about comparing them.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).