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Merchant Account Processing

How to accept customer credit cards

Whether you're building a Web site or a traditional business, you must first open a merchant account before you can accept credit cards as payment.

How the process works

When you swipe a credit card through a point–of–sale terminal at the grocery store, you are not completing a transaction. The grocery store is verifying that your credit card is active and you are within your spending limit. The transaction is not completed until later (e.g. end–of–day) when the grocery store sends a collected batch of transactions to its merchant account provider for processing.

Credit card orders can be initiated in one of three ways:

  • When a merchant swipes a customer's credit card through a point–of–sale terminal (card present)

  • When a customer provides credit card identifiers over the phone or via the mail (card non–present)

  • When a customer provides credit card identifiers over the Internet (card not–present)

Real-time verification

Real–time verification reduces the potential for charge–back fees and prevents the hassle of card entry errors. Here's how real–time verification works: After a credit card order has been received by the merchant, the identifiers and sales price are sent to the secured server(s) of the merchant account provider, who then forwards that information to the customer's credit card company and bank. Once the customer's bank approves the transaction, that approval is sent back to the merchant, verifying the credit of the customer.

Customers are more likely to initiate purchases if they are able to buy on credit. And they are likely to spend more than if they paid with cash or by check.

It is possible to purchase a merchant account service without real–time verification. Though set–up costs may be less, if you expect to process more than 25 credit card (non–present) orders a month, most vendors will advise you to purchase a real–time service.

Note: Point–of–sale terminal transactions are always verified in real–time.

Receiving funds

Once the merchant account provider receives the full amount of the transaction, they credit the merchant's account for the transaction. This process, from start to finish usually takes two to four business days (compared to 25–40+ days for invoice payment methods).

Online accounts

If you are building or expanding your e–commerce presence, setting up an online merchant account makes perfect sense. It enables you to expand your customer base, and it facilitates a fast and efficient purchasing process.

Security for online accounts

Make sure that the online merchant service provider uses SSL (Secure Sockets Layer) or SET (Secure Electronic Transfer) technology (or proven equivalents). Also be sure that the merchant can provide for:

  • Data integrity: the customer's transaction data cannot be tampered with during transmission.

  • Authentication: verifies to the customer that you are who you say you are so that transactions cannot be intercepted.

In-house processing of online accounts

If you are interested in processing transactions in–house, then you need to also consider two additional security issues:

  1. You must secure your server. This includes building a firewall so that hackers cannot easily break into your database and steal the credit card identifiers of your customers. You may also want to permanently store credit card numbers on a database that is not accessible from the Internet.


  2. You should strongly consider obtaining a digital certificate from a third–party certificate authority (e.g. Verisign, Valicert). A digital certificate acts as a business license, verifying the legitimacy of a registered business. Digital certificates also initiate SSL transactions. A lock displayed at the bottom of a browser window indicates a secured server and transaction. Many customers will not provide their credit card information unless transaction security is guaranteed.

Offline accounts

There are two types of offline accounts:

  • Card–present point–of–sale terminal transactions (e.g. restaurants, retail stores)


  • Card not–present over–the–phone and mail order transactions (e.g. magazines, clothing catalogues)
Point–of–sale terminal transactions involve the least amount of risk, which means the monthly fees will be lower.

Note: Some providers only process offline transactions. If you need both online and offline services, you may want to find a provider that can facilitate both, rather than open two accounts.

Types of service/equipment

  • Point–of–sale terminals

  • Point–of–sale terminals allow a customer to slide their credit card through a terminal to verify transactions in real–time. Look for a terminal package specific to your industry. Not only will the point–of–sale terminal(s) be suited for your business, but the supporting package should be geared to suit your needs as well.
  • Card present service (terminals)

  • In most cases, the point–of–sale terminal is connected to the merchant account provider's network via a private dial or leased line. This allows real–time verification. In some cases, the point–of–sale terminals connect to a computer system. The provider will likely offer to install everything for a set–up fee.
  • Card not–present service (mail/phone)

  • For mail orders and low–volume phone orders, customer transactions are entered into a computer system (or in some cases, a point–of–sale terminal). Transactions can be integrated into your existing customer database. The provider will likely offer to install everything for a set–up fee.
  • Card not–present Internet application service (phone)

  • If you expect to process a high volume of phone transactions (several per hour plus), consider an Internet application service. This service allows quick real–time verification of each transaction, reducing the potential for charge–back fees and entry errors.

Bottom line

The psychology of credit cards is fairly straightforward. Customers are more likely to initiate purchases if they are able to buy on credit. And they are likely to spend more than if they paid with cash or by check. As a merchant, you are also reimbursed within two to four business days. This may significantly reduce your payment lag, especially if customers you are currently invoicing pay by credit card. On the flip side, a merchant account does require you to pay initial setup costs, as well as fees for each customer transaction.

A few things to keep in mind when reaching your decision:

  • Monthly fees: Strategize fees. It is important to understand the monthly fees associated with your merchant account. When looking for a provider, try to balance the discount rate and per–transaction fee with your needs.

    For example, if you expect to make a small number of large ticket sales, then look for a higher per–transaction fee and lower discount rate. If you expect a high volume of small ticket transactions, then look for a low per–transaction fee and a competitive discount rate.

    Also, keep your eye on additional charges that add up, notably charge–back fees and touch tone authorization fees. If your business is prone to returned items, and/or does a high volume of point–of–sale terminal sales, then these two fees can add up.

  • Customer service: Ensure that your provider has solid customer service. If you are opening an e–commerce site or a restaurant that is open beyond normal business hours, then you probably need 24–hour customer service.


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