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Some research required when choosing credit card processor

Aug 30, 2012 - By Cindy Unger

Question --"We are just starting a new retail business that will have both a physical and an online presence. What do we want to know about credit card processing?"

-- Christine, Casper

Answer -- In 2011, $1.9 trillion was charged in the United States alone. Online transactions were a major contributor to that figure.

Credit cards are now being used to pay for both large business-to-business transactions, along with $1 bottles of water at convenience stores. Unfortunately, choosing a credit card processor is not a straightforward decision due to variations in fees charged and services available.

The first step is to research the different types of credit card processors. Your bank is probably the first place to look because they probably offer a business package that includes merchant services. Most banks do not actually process credit card transactions themselves, but typically outsource the work to a third-party credit card processor. Bankers look carefully at your business before deciding whether or not to accept your application.

Another alternative is to use an independent sales organization. These are registered credit card merchant brokers who may represent one or more third-party processors. They set up and service credit card merchants, but don't do the actual processing. An ISO may be less selective than the bank, but probably will charge more. Be careful when evaluating potential ISO suppliers. Some are reputable, established companies that provide good customer support, while others may be "questionable" operations.

To qualify for a merchant account, the service provider wants to be sure you are a legitimate business. They check the credit history of the owners or officers, and require credit references from your suppliers.

An important concern for the providers is whether your business is likely to have a high incidence of chargebacks. A chargeback is a reversal of a sale that was initially credited to your account. The chargeback may result from an error made by the cardholder's bank, a misunderstanding by the customer or fraud.

Typically, the sale of tangible products is considered to be much safer than the sale of services. Providers also will consider the type of credit card transactions that you will primarily be doing. Card-present transactions are sales where the merchant physically swipes the credit card and obtains a signature in person.

These are considered to be much safer than card-absent transactions that occur by phone, mail or online. Being a higher-risk merchant will not necessarily prevent you from obtaining a merchant account, but may increase your costs.

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Editor's note: Cindy Unger is the WSBDC business adviser, part of WyomingEntrepreneur.Biz, a collection of business assistance programs at the University of Wyoming. To ask a question, email at wsbdc@uwyo.edu or call at 1-800-348-5194.

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