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by Richard Boettner The challenges business face as they start-up are familiar to everyone who has gone through it: pulling together the money needed to start-up, fighting government red tape, acquiring licenses, hiring talented people, marketing to get the word out, and finding and keeping customers. This is all made worse for a small retail store and other small businesses who rely on foot traffic or Internet visitors, where the biggest frustration is setting up some sort of credit card system. This is a frustrating and not a simple task. MasterCard and Visa require a small business to enroll through middle-men, brokers like financial institutions such as the bank where the business has its accounts, payment processors or independent sales organizations – commonly referred to as I.S.O.'s – which solicit business through telemarketing or with door-to-door agents. American Express is the exception which permits registration directly through its own center or through intermediaries. This process is not cheap. As new business owners quickly learn, the process entails piling through complicated documents analyzing dozens of seemingly incomparable offers including varying terms for leasing a terminal to swipe credit cards, all for the purpose of accepting or rejecting credit cards and for issuing monthly statements, to name just some of the most basic services. Also different intermediaries make funds available anywhere from 24 to 72 hours after a sale is made. Small businesses get a quick lesson in the hard-sell tactics some I.S.O.'s use in order to get them to sign up. As soon as a new small business is incorporated, unsolicited offers begin to pour in to process credit cards creating a flood of offers. They try to entice a business with all sorts of things, one example, "trips to the Bahamas or a $1,000 signing bonus." Relying on your bank can be a smart move. The bank where a business has its accounts may have programs, relationships or may be associated with an I.S.O." Alternately trade organizations or other industry groups can sometimes recommend a company. Once the credit card terminal or software, is set up, even the smallest sale sets off a whole host of complicated and sometimes costly transaction fees which whittle away at the bottom line. Fees vary by the size of the business, length of time they have been in business, the industry they are in and whether charges are done in person, by phone or online. It is up to the bank, payment processor or I.S.O. to establish the rates a merchant pays. A small business may pay less than 2% of each sale, but have additional transaction fees on top of that base rate. For example, a merchant pays 1.79% plus a fee of 32 cents for each sale and this varies with each type of credit card. On a $300 purchase that may come to $5.69 in fees. More fees follow. Businesses pay extra when they manually type in any credit card account numbers on a terminal rather than swiping the card itself. This can be especially frustrating when the strip on the back of a card no longer works. The percentage rate can jump to 2.66% of the RichardBoettner.com 1
purchase price plus a higher fee of 42 cents. On the same $300 purchase it results in $8.40 fees to the credit card processor, an expense that quickly eats away at profits, driving up the price of everything customer's buy. Credit card companies and banks use the excuse, for charging higher rates because, they consider transactions typed in, not electronically read to pose a greater risk of fraud. The higher fees are intended to cover the cost of "charge-backs," a refusal to pay by credit card holders either because the card use was unauthorized or the purchase was returned or was defective. Higher rates do not provide a merchant any sort of protection program. An example: Jehv Gold, the owner of Manhattan Fruitier, a gift-basket company, learned the limits of his protection the hard way. When a customer called to order two gift baskets, the charges were authorized, initially. When the same customer called a third time, however, the company's terminal read "pick up card," a phrase indicating that the card was invalid. Manhattan Fruitier rejected the order. At the end of the month, the company's bookkeeper discovered that the customer's first two charges, totaling $1,000, were also denied and thus charged back to the merchant, even though the baskets had already been delivered. When the bookkeeper approached the company's payment processor, Global Payments Inc., he was told that Global would not absorb the loss. Merchants typically have no recourse for fraud, unless they had taken several steps to verify the customer's identity, including verifying that the billing and shipping addresses matched. Some larger companies are able to afford insurance against such fraud, but not the small business owner who struggles to make ends meet and hopefully see a profit at the end of the year. Major credit card companies are currently seeking to change things, essentially requiring personal identification numbers to be punched in whenever a credit card is used or a kind of smart chip inside credit cards. Visa already has Verified by Visa, while MasterCard has SecureCode and American Express uses an address verification program to protect merchants from fraud. We have yet to see their true benefit or if merchants will have to pay yet a higher cost for accepting credit cards. Finding the best deal on leasing a credit card processing (swipe) terminal is another aggravation for retailers who are trying to set up credit card terminals. Leasing fees vary widely from $20 a month to $60. Those lucky few who do a lot of shopping around may be able to find a company that charges no monthly fee whatsoever. But, one thing is clear, no one should pay the higher fees some companies charge and by looking around should get a lease for $20 a month, because they are out there. Merchants who try to save by not accepting any credit cards whatsoever pay in other ways. So many customers anymore use a credit card for all their purchases for the benefits, such as to rack up frequent-flier miles or on cash back programs. So, customer's may not shop at a store that does not accept credit cards. What customers don't realize, they are actually paying for these rewards, even if they don't see a fee themselves or pay off their credit card each month.
There are two problems thinking this way: 1) reward programs are pure incentives for someone to use the credit card and they can go away at any time. Also, in the last few years, many reward programs have cut back, with some airlines increasing restrictions, such as making fewer seats available to these reward programs. 2) Even if the customer does not pay any fees and never makes a late payment, the merchant is still charged every time a customer uses a credit card which forces them to raise their prices to make up for the shortfall. People are easily lured into thinking that they are getting something for nothing with these programs when just the opposite is true. Using credit cards may be convenient, but they are not cheap and certainly never free, even if the balance is paid off in full each month. That's the hidden truth behind credit cards no one wants to admit to, most of all credit card users. Businesses who do not accept MasterCard and Visa will lose business But there is a way around any potential loss of business by not accepting credit cards. Place a sign in plain view, to help educate the public, which states that all credit card sales will have an additional charge added to make up for the fees a merchant are charged. Make it a small fee, maybe $2 or $3, just enough of an annoyance but not enough to drive business away and make sure people understand that every fee a credit card processing company charges you, the merchant, has to be passed on and that many merchants hide the fact by continually raising their prices. Or, in reverse, give people who pay with cash a $2 discount. Then ask them if they wouldn't want to use cash instead. There are also well documented cases where merchants had to fight because they were either overcharged or they never received their deposit from the sales made. Lawsuits have run into the millions against the credit card processing industry. This price is also passed along to merchants and in the end the customer pays a higher price for an item they are buying. Credit cards may be convenient but they are also very costly. Ultimately, it is up to a business owner to be extremely vigilant in the choices they make and who they use to process their payments. Do your homework! Look for all the hidden fees and ask lots of questions before signing on the dotted line. Go as far as to pester would-be providers with plenty of questions. See if they have a 24-hour help line with live people or how the company handles charge-backs. Ask them how long they have been in business and who they represent. Also, checking with the Better Business Bureau can help. And before you sign up, do an online search for reviews of the company to see what other's may have had to say about them. Ultimately it comes down to this, if a small business accepts credit cards, the average price will have to go up by at least 6% to cover all the fees associated with credit card processing. Using the same example as above, on a $300 purchase that 6% extra comes to $18, raising the price of the item to $320 to make sure the company is not losing money. ($318 would not cover the fees because remember, there are fees on the $18 as well, so the price has to go up to cover those fees too. And, price continues to go up from there.) Educate the public and if they are still willing to use their credit card, charge them for it. Cash is always better, no fees. RichardBoettner.com 3
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