Accepting credit card payments is crucial to the success of your online business: it allows you to capture impulse buyers and casual surfers drawn by special deals, and it can ensure that you receive timely payment.  According to some sources, online businesses must accept credit card transactions or risk losing 60% of their potential business.  And although credit card processing may seem like a complicated process, each transaction only takes five steps to complete.

As you can see from the above diagram, while electronic credit card processing has become streamlined, it's still not quite as simple as putting up an order form and waiting for the money to roll in. Some of the steps you'll need to take to set yourself up to accept credit cards include:

• Preparing a secure order form: A secure order form allows sensitive credit card data to be encrypted, which lessens the chance of data being hijacked.
• Establishing a merchant account: A merchant account is basically a banking account to receive payments from the credit card company.
• Establishing a way to process credit card orders: This can be done by hand offline with the card orders transmitted via phone or fax to your credit card company, or with a credit card processing service. 

In many instances, one company can provide you with both a merchant account and credit card processing.  Selecting one of these providers can work to your advantage because it will remove a layer from the credit card transaction.

Secure Order Form

A secure order form is a must in the days of hackers and cyberthieves.  A secure order form protects your customer's information and ensures that it is encrypted before sent winging through cyberspace. The form itself isn't difficult; it can be built using HTML and a CGI script. But before you can begin accepting confidential information, it will need to be encrypted using Secure Sockets Layer (SSL). Your ISP may be able to provide you with SSL for a small fee. Once your form is built, you'll need to get a certificate verifying that it is secure, which you can obtain from VeriSign (http://www.verisign.com) for about $350.

Merchant Accounts

A merchant account is a special account set up through a bank or an independent service organization to accept money from credit card transactions.  A merchant account can be opened with your local bank or with an out of town bank or an Independent Service Organization (ISO). 

Because of the larger risk of fraud involved in online transactions, getting a merchant account is not quite as simple as walking into your local bank and opening a checking account. Before you can get a merchant account, you'll need to complete an application that will include your business and/or personal credit information and an estimate of the number of transactions you'll be processing.

The credit information is necessary because of the large risk of fraud involved with Internet sales. If a customer protests a sale and the credit card company agrees to remove the charge from his account, the merchant is liable for paying the credit card company back the amount in dispute. That's why many banks will not open merchant accounts for businesses that are fewer than two years old.

Many new businesses turn to ISOs, which work with banks, both in the US and internationally, to open merchant accounts for customers. Although it is a convenient way to provide one-stop shopping, it is often more expensive than opening a merchant account through a bank.

Your Account Application

The best place to start your search for a merchant account is with the bank where you currently have your business or personal accounts. In addition to credit card information, you'll need to provide the bank with an estimate of the number of transactions you'll be processing monthly. This information is important for two reasons: many institutions determine processing fees by the amount of transactions you process, and determine the amount of money you'll need to deposit in an account to cover possible fraudulent charges. Therefore, it's important that you estimate as accurately as possible: too low and you might end up with high service fees, too high and you could end up having to make a large deposit.

After you've checked with your local bank, you may want to investigate national banks that provide merchant accounts. You may be able to find a lower rate or find a company that offers credit card processing in addition to merchant account services. In addition, some ISOs, such as Card Pro Merchant Services, provide a wealth of services and information to help you get your business off the ground.

Choosing a merchant account provider is an important decision because this company is responsible for making sure that your funds get from the credit card issuer into your account. The company you choose to provide this service for you should be knowledgeable about e-commerce and credit card processing.  Some sites offering merchant account service are little more than infomercials for e-commerce with very little information about credit card processing. Make sure the company is registered with the card issuers you want to accept.  A reputable company will have its own domain name and not be hosted by a free service provider such as Geocities, Free Yellow, or Xoom. The company should also provide a customer service number and not just an email address through a free provider such as Yahoo! or Hotmail.

Fee Structures

Merchant account providers charge both a discount fee and a transaction fee.  The discount fee is a percentage of the transaction. For instance, if a bank charges a 2.5% discount fee, it will cost you $0.25 to process a $10 transaction, or $2.50 per $100 charge. In addition to the discount rate, banks also charge a fee per transaction.  In the above example, if the transaction fee is $0.25, you'd pay a total of $0.50 on the $10 charge and $2.75 on the $100 sale. Discount rates and transaction fees vary depending upon your type of business, sales volume, and business credit rating.

The following chart provides details about companies providing merchant accounts. The Case Rate and Case Fee columns represent a discount rate and transaction fee for a hypothetical toy store that's been in business for one year and has just established an online presence. The toy store has an excellent credit rating and processes 200 transactions a month with an average transaction of $100.

 The columns are:

 Rank:  Based on cost, professionalism of website, and services offered.

Name:  Name of institution.

Cards ACC: Which cards the bank accepts payment from.

Disc Rate:  The range of discount rates charged.

Trans Fee:  Fee charged for each transaction.

Case Rate:  Rates charged to a specific Internet business.

Case Fee:  Fees assigned to the specific Internet business.

Notes:  Any other pertinent information.

 

Credit Card Processing

Once your customer has entered his credit card information into your form and pressed the send button, the job of verifying the account number, checking the credit limit, and determining that a card has not been reported stolen begins. Most credit card processors will also verify the customer's address to make sure that it matches the address on file with the card's issuing bank.

Credit cards can either be processed in real-time or collected and batch processed. Real-time processing means that the customer enters credit card information, it is immediately accepted or denied, the customer is notified, and if it was accepted, the transaction is concluded. Batch processing means that a number of credit card transactions are processed together at a later time.

The obvious advantage to real-time credit card processing is that the transaction is processed immediately and the customer knows whether or not it has been approved. However, the risk of fraud is greater with real-time processing, because you take the chance that a stolen card is being used before it has been reported stolen. Another disadvantage to using real-time processing: if your credit card processor's server goes down, you cannot accept any orders.

Batch processing can be the better option for smaller businesses because it lessens the risk of fraud. Although you can perform batch processing by collecting the information and then phoning it into your bank, contracting with a credit card processing company allows you to process transactions via the Web or through dial-up networking. In addition to being faster, computerized processing also reduces the risk of error.

If your merchant account provider doesn't offer card processing, research your online options carefully. Many credit card service providers are allowing resellers to become involved in the process, so it pays to know who you're dealing with.  It's also important to make sure that your bank will work with your credit card provider. Most banks will deal with the big names in credit card processing, which include Cybercash, PC Verify, and I Authorize.  

The following is a list of reputable credit card service providers.