The Card Game

In today's marketplace, it's more important than ever for retailers to offer customers the convenience of credit card sales. Indeed, many consumers prefer not to carry a lot of cash, so a retailer that accepts credit card sales gains instant favor with customers, who can buy when the impulse strikes them. Nowadays, retailers that don't accept credit cards just can't compete. They end up losing sales to competitors that provide the ease of credit card service. So it's definitely time to get in the card game. But before you do, you need to understand the basics of credit card transactions — and the charges that accompany "merchant" status.

Don't assume that the rates charged by banks and credit card companies are all the same. Nor that they are the same for every retailer. As with everything else, shopping for the best service and most affordable rates makes a great deal of sense. Among the factors you must consider are:

The Discount Rate. Comprised of the transaction charges, the interchange rate, and the transmission costs, this is the amount that is deducted and paid to the credit card company and the issuing bank for each transaction. It usually ranges from 2.5 to 5.5 percent of the total credit sale, depending on the volume of sales and the typical transaction size.

The Transaction Charge. This is the profit that the processing network makes from the transaction. It's usually included in the discount rate, but it may be charged separately. The transaction charge is often the only element of the discount rate that can be negotiated. If one bank has a transaction fee higher than another, ask why. And don't forget to ask whether additional services are available for that higher fee.

The Interchange Rate. The interchange rate is the cost of processing the charge through the Visa or MasterCard network. The current interchange rate for "swiped transactions" is 1.30 percent for MasterCard and 1.35 percent for Visa.

Transmission Costs. The cost of transmitting the sale information through the processing network is expressed as a cost per ticket and normally runs about 18 to 23 cents per transaction.

Non-swiped Surcharges. Federal regulations require an additional charge of about 0.30 percent per transaction to the cost of "non-swiped" transactions. Thus, the total interchange rate for non-swiped transactions is 1.60 percent for MasterCard and 1.65 percent for Visa.

Charge Back Rates. Procedural charge backs occur when the retailer doesn't follow all of the rules set by the bank. Customer-initiated charge backs occur when customers attempt to cancel a transaction for some reason, usually because the goods were damaged or because they claim the charges were excessive. A charge back differs from a simple return of your merchandise because the credit card company is involved. You should know what the charge back rate will be for your operation, as well as the charge back rate limit set by the credit card company. (It's usually about 1 percent of credit sales.)

When a retailer goes to a lender to open up a credit card account, they are required to make a full financial disclosure, just as if they were asking for a loan. Recently, with credit card fraud topping $200 million a year, banks and other lenders are even more skittish about opening commercial credit card accounts. So make sure you have your papers in order before going to the bank.

For every retailer whose bank has denied them a merchant account, there is an Independent Service Organization (ISO) waiting to serve. After being contacted by the retailer, an ISO contracts with the bank, effectively bearing the risk of doing business with the retailer. Naturally the ISO will charge the retailer for its services. But a word of warning: There are over 1,400 ISOs in the U.S., and they're not regulated. Always investigate the charges before entering into an agreement with an ISO.

While the increased security of computer equipment has helped combat fraud, it has also increased costs for merchants, because scanners are much more expensive than the old credit card imprinters. While an imprinter can be obtained for about $25, a scanner terminal, under a four-year lease, will usually run about $75 to $100 per month. The equipment can also be purchased, but beware. Before making any purchase, find out what your bank will charge to connect that equipment to their system. The extra costs may make renting less expensive than buying. On the bright side, electronic processing of credit charges means the money is available sooner, helping defray the cost of doing business.

If you already have a computer, you can purchase software that's less expensive than the full scanner set-up. But make certain beforehand that the software is compatible with your bank's system.

At the time of a sale, the bank will authorize the charges and notify the credit card company (or some company acting on its behalf). The credit card company (or its agent) will then collect the money from the bank that issued the card, send it to your bank, and bill the customer. Once the retailer's bank has the money, it will put it in the business's account, minus a processing fee (the discount rate). That discount rate is usually split between the bank and the credit card company.

Fortunately, that coveted, and necessary, "merchant" status is not only possible but affordable. All that is required is an understanding of the entire process and a little shopping for the best deal.