Definition: The relationship between a company and a bank or credit card
company that allows the company to accept credit card payments from
its customers
To accept major credit cards from customers, your business must
establish merchant status with each of the credit card companies
whose cards you want to accept. You'll probably want to start by
applying for merchant status with American Express or Discover. For
these cards, all you need to do is contact American Express or
Discover directly and fill out an application.
However, chances are you'll want to accept Visa and MasterCard,
too, since these cards are used more frequently by consumers. You
can't apply directly to Visa or MasterCard, however; because
they're simply bank associations, you have to establish a merchant
account through one of several thousand banks that set up such
accounts, called "acquiring banks."
The first thing you need to understand about accepting credit
cards is that the bank views this as an extension of credit.
There's also the real concern that if your company goes out of
business before merchandise is shipped to customers, the bank will
have to absorb losses.
While the requirements vary among banks, in general a business
does not have to be a minimum size in terms of sales. However, some
banks do have minimum requirements for how long you've been in
business. This doesn't mean a startup can't get merchant status; it
simply means you may have to look a little harder to find a bank
that will work with you.
While being considered a "risky business"--typically a startup,
mail order or home based business--is one reason a bank may deny
your merchant status request, the most common reason for denial is
simply poor credit. Approaching a bank for a merchant account is
like applying for a loan. You must be prepared with a solid
presentation that will persuade the bank to open an account for
you.
You will need to provide bank and trade references, estimate
what kind of credit card volume you expect to have and what you
think the average transaction size will be. Bring your business
plan and financial statements, along with copies of advertisements,
marketing pieces and your catalog, if you have one. If possible,
invite your banker to visit your store or operation. Banks will
evaluate your product or service to see if there might be potential
for a lot of returns or customer disputes. Called "charge-backs,"
these refunds are very expensive for banks to process. They are
more common among mail order companies and are one reason why these
businesses typically have a hard time securing merchant status.
In your initial presentation, provide a reasonable estimate of
how many charge-backs you will receive, then show your bank why you
do not expect them to exceed your estimates. Testimonials from
satisfied customers or product samples can help convince the bank
your customers will be satisfied with their purchases. Another way
to reduce the bank's fear is to demonstrate that your product is
priced at a fair market value.
The best place to begin when trying to get merchant status is by
approaching the bank that already holds your business accounts. If
your bank turns you down, ask around for recommendations from other
business owners who accept plastic. You could look in the Yellow
Pages for other businesses in the same category as yours (home
based, retail, mail order). Call them to ask where they have their
merchant accounts and whether they are satisfied with the way their
accounts are handled. When approaching a bank with which you have
no relationship, you may be able to sweeten the deal by offering to
switch your other accounts to that bank as well.
If banks turn you down for merchant status, another option is to
consider independent credit card processing companies, which can be
found in the Yellow Pages. While independents often give the best
rates because they have lower overhead, their application process
tends to be more time-consuming, and startup fees are sometimes
higher.
You can also go through an independent sales organization (ISO).
These are field representatives from out-of-town banks who, for a
commission, help businesses find banks willing to grant them
merchant status. Your bank may be able to recommend an ISO, or you
can look in the Yellow Pages under "Credit Cards." An ISO can match
your needs with those of the banks he or she represents, without
requiring you to go through the application process with all of
them.