Plastic Fantastic – A Beginner’s Guide to Accepting Credit Cards


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by: James Esch


Face it, the cash economy is winding down. Credit cards are ubiquitous, and if you’re selling anything more than gum and newspapers, you probably should be accepting plastic. If you’re ready to enter the world of “merchant acquiring”, (the strange name for the process of merchants accepting credit cards), we’ve put together a little introduction here.

Credit Card processing starts at the point of sale. Say your customer wants to buy a new widget. She hands you a Visa card. The store clerk swipes the card through the electronic terminal, maybe punches some numbers, and waits for “authorization.” After a few seconds, the authorization is received, a receipt is printed, the customer signs, and off she goes with her widget.

Here’s how Authorization works: after swiping a card, the card number and related data go through an Acquiring Processor (who handles the merchant’s side of a credit card transaction), which channels the transaction to the credit card company (e.g., Visa). The credit card company requests authorization from the Issuing Bank (the bank that issued the card). After the Issuing bank approves the transaction, it transmits an approval code back through the credit card company to the Processor and the Merchant at the point of sale.

It’s a long electronic trip, but it takes only seconds. And the story isn’t over yet — the merchant hasn’t been paid! That doesn’t happen until “settlement” takes place.

Settling usually happens at the end of the day by either taking paper sales receipts to the bank (common in ancient times) or transmitting the receipts electronically from the card terminal in a batch. The receipts go down the line to the Acquiring Processor, which plays traffic cop, routing the transactions to the different credit card companies. The credit card companies funnel the transactions to the Issuing Banks for posting to cardholders’ accounts. At the same time, the Processor credits the merchant’s account and a processing fee is deducted, better known as the “discount rate” (typically 1.75% to 3% of the sale).

There’s more to credit card processing than our point-of-sale example. What about phone orders, mail orders, e-commerce orders? These are known as “MO/TO” or mail order/telephone order transactions, and the dynamics are different, the risks higher. These orders don’t have the benefit of signature verification to ensure the customer’s identity. Many financial institutions require that such transactions be covered under separate “Card Not Present” merchant accounts. Expect discount rates to be higher for MO/TO.

Avenues of Pursuit

When you’re shopping for a merchant account, spend some time and ask the right questions. Understand the whole package — don’t just look at at the discount rate, for instance.

Here are some things to look for, in addition to the discount rate offered:

Check to see when settlement occurs. After all, this is when you get your money. You might get a discount rate advantage, but if you don’t get your money for days, you lose the value of the cash flow.

What kind of technical and customer support does the processor offer? (Anyone remember Murphy’s Law?) Is support available 24×7?

Some processors offer customized services for certain businesses: retail, hotels, restaurants, doctors and lawyers, telephone sales, etc. In some cases this can reduce administrative and operational costs substantially. See what the specialized offering is, look for the fine print, and compare it to a generic offering.

Keep an eye peeled for hidden costs such as statement fees and voice authorization charges. Many of these fees are a part of doing business, but they can vary a lot, and if you need extra support, you don’t want to be paying excessively each time you use it.

Above all, read and understand the terms and conditions before you sign up. Merchant processing is a complicated endeavor, and you need to know exactly what you’re signing up for.

Even if you’re starting out simple, make sure your merchant provider is flexible enough to accommodate transactions. Even though you may just have a simple store today, tomorrow even simple stores may turn out to be e-commerce players.



If there’s a downside to accepting credit cards for payment, it can be encapsulated in one word — chargeback. A chargeback occurs when a transaction is reversed, and the amount of the transaction, previously credited to the merchant’s account, is then deducted.

Chargeback rules were originally created to protect cardholders from erroneous transactions, which were more common when transactions were processed using little slips of paper. Now chargebacks occur for many reasons: unauthorized credit card user, no signature on the receipt, double-charging errors, credit card expired, bank error and customer disputes. Be careful with chargebacks; too many will risk losing your merchant credit card account.

Precautionary tactics are the best preventative medicine. Make sure you follow the rules set by the bank/processor. You need a routine for processing credit cards, and your sales staff must follow it religiously. For phone and Internet orders, get the customer’s home and work phone numbers, and verify that info before sending merchandise.

A great way to head-off customer disputes (and chargebacks) is to provide a liberal return policy. In those cases where you can’t avoid a customer’s attempt for chargeback, you’ll need to provide suitable documentation (sales and shipping receipts) to refute any claims.

Up-Front and Hidden Costs

Yes, there are costs associated with credit card processing — no gain without a little pain. Below are typical costs you might face, with some ballpark estimates. All of these should be taken into consideration when you’re comparison shopping for a merchant account.

Application fee ($0 — $300)
Installation/setup fee ($0 — $100)
Bank setup fee ($0 — $75)
Terminal costs ($200 — $2000)
Statement fee ($0 — $10 per month)
Minimum account billing (varies…often not required)
Chargeback fee ($0 — $25)
Voice authorization fee ($0 — $1 per call)
Transaction fee (Varies, usually around .20 per transaction)
Daily close-out fee (Varies…often not required)
Discount rate (1.75% to 3% of sale)

Despite the costs, consider the upside: credit card sales are a customer-centered service; they’ll love you for the privilege of paying by plastic. Plus, customers tend to buy more per sale when paying by credit than cash.

And don’t forget, there are also costs associated with handling cash — counting, trips to the bank, the hassle of keeping adequate change on hand, and even potential losses through mishandling currency.


1. Understand the credit card process before making any decisions. Apply new knowledge to your unique circumstances — ask questions, network, e-mail your colleagues, explore the links on BizzedSM and other websites.

2. Shop around, and keep a running list of the features and benefits of each provider, plus the costs. Start with the costs on the previous page, but be sure to dig deep to uncover any potential costs with each provider. Don’t overlook the benefits of working with a world-class full-service provider (like Express Merchant Processing Services, a BizzedSM partner). The added operational and technical support you might receive can be well worth a slightly higher discount fee.

3. If you are a small home or mail order business, you might have some difficulty getting approved. If so, you might start with your existing bank, or another small to medium-sized bank. When you apply for an account, expect to be asked for full financial disclosure — banks are quite sensitive to credit card fraud.

4. If your bank or another processor turns down your request for a merchant account, never give up! Try other banks/processors — there are lots to choose from. You could also opt for an Independent Service Organization (ISO), which shoulders the risk and contracts with a bank on your behalf. Buyer beware though — always explore all the costs, fees, and charges associated before entering into any agreements.

5. Keep your eye on where you’re headed and where you want to grow. The goal with credit card processing is getting the infrastructure in place so you can sell smoothly, conveniently, affordably, without glitches and holdups — a process scaleable to your aspirations.

For instance, currently you may run a cash-only business and want to grow into point-of-sale credit card transactions. Fine. But where do you want to be in a six months, a year? Do you foresee accepting orders over the phone or setting up an e-commerce store on the net? This kind of forward-thinking will help you make the right up-front decisions.

When You’re Up and Running

When you get your merchant account and begin accepting cards, be sure to establish and follow good operational procedures. Your provider will assist you in understanding required procedures. Key items are signature verification, authorization procedures, and physical card inspection.

Be careful — different cards may require different procedures (e.g., American Express v. Visa/Mastercard), and there will be different procedures per transaction type (point-of-sale, phone, mail, and e-commerce orders).

More than anything else, following the correct operational procedures will protect your business against chargeback losses. Make sure everyone handling transactions for your business knows the procedures. Training is key, although posting reminders and “cheat sheets” at the point-of-sale can be very beneficial as well.