Accepting online credit card payments: an introduction

It is almost impossible to do business online without accepting credit card payments. However, particularly for small businesses, it is not always easy to access credit card payment systems and, even if your business is already accepting card payments, it is quite possible that there are alternative systems available to you that will offer better rates or more convenient payment schedules.

Choice is greatest for companies based within the United States of America or Canada, but even outside these jurisdictions the range of options is continually increasing. The aim of this article is to provide a broad introduction to the options available to new businesses, and to provide pointers to more detailed information on the different options, so that you can make an informed choice about what is most suitable for you and your business.

To begin accepting credit card payments on your website, you have three basic options:

  • To set up and independent merchant account with your bank
  • To use an intermediary or broker service to secure a merchant account
  • To accept payments through a third party

The first of these options is the most direct and almost certainly the most economic for your business. In many cases, banks will automatically provide you with details of their merchant account services when you open a business account at your local branch.

The disadvantage for small businesses and start-ups is that many banks have very rigorous requirements which have to be complied with before applicants can open a merchant account. These can include audited business accounts for a year or more, detailed business plans, or proof of significant investment capital.

As most banks are still refining their services for Internet traders, many are still wary of accepting small business accounts without a raft of guarantees. While it is comparatively easy to establish a traditional retail account, where credit cards have to be swiped using a PDQ, and a signature has to be provided before payment is accepted, accounts for online trading, where only a card number is required, are much greater risk from fraudulent payments.

While banks are beginning to adapt to the needs of online clients, for first-time traders wishing to establish a merchant account to accept online card payments it is generally much easier and more reliable to work through an intermediary company. Although this means that your application will be vetted by an extra body, it does also considerably increase your chances of acceptance. Intermediary companies can draw on their experience with banks to help you pitch a successful application. It is advisable, obviously, to check intermediaries' acceptance rates.

When applying to an intermediary, the most important factor to take into account is your risk profile. By minimizing risk in your business in any way you can, you greatly increase your chances of being accepted both by intermediaries and by banks.

One technique to do this is to plan your business so that you aim initially to sell only low-priced items online. If you plan to start selling only a few hundred items per month at prices of $10 or less, then you represent a much lower risk than if your plan is to sell large numbers of high-priced products immediately. Start small, and then expand once you have proven your security worth.

It is also important to be able to provide evidence of your financial solvency. Many companies will want to see credit card bills, details of mortgage payments, and other evidence of personal net worth. It is therefore advisable to minimize your personal debt wherever possible before you submit an application.

There are also some less tangible factors that may affect your chances of acceptance. It is worth considering forming a limited company - an Inc. or Ltd. - to make your business appear more professional. As it is now possible to register limited companies over the Internet for very small sums of money, it is certainly worth the effort.

With all aspects of the application process and this may include questions about product guarantees, monthly overheads, past experience of fraud, and a host of other topics, your aim must be to present your business as safe, and to instill maximum confidence in the intermediary. It is also true that, by improving your security, you not only have a better chance of being accepted, but also may find that you are offered a better deal by the intermediary.

By applying through an intermediary, you will also able to resubmit and refine your application. Many intermediaries do not demand application fees, so it always pays to apply for your own merchant account before considering the third option.

If you are not granted your own merchant account, then your only available option is to use the account of a third party to accept credit card payments online. Setting up an account with a third party to process payments is usually incredibly straightforward. As a rule, you simply have to submit a form with your contact details and, in most cases, pay a small "activation fee".

While third part processing may be the only option available to startups and small businesses new to Internet trading, it does have some disadvantages. The main drawback with this option is the delay in receiving payments that use of a third party normally entails. While intermediaries for merchant accounts usually deposit the money paid by your credit card customers within one or two working days, third party processors on average withhold funds for on average 14-28 days, and sometimes up to 45 days if their policy is to settle mid-month for transactions carried out in the previous month. Obviously, this can cause cash flow problems for your business, and significantly stunt expansion.

The second disadvantage is that fees for third-party processing are bound to be considerably higher than the processing fees charged by banks or intermediaries for an independent merchant account, whether they are monthly fees, fees per transaction, or a combination of the two.

Finally, using a third party processor severely limits your interaction with your customers and can damage the professional image of your business. The chances are that, to accept card payments, you will have to direct customers to the third party's website, where they will need to complete a generic order form, although it is normally possible to customize the form in some way, for example by adding your company logo. In addition, because payments are processed through the third party's account, their name and not yours will show up on your customers' credit card bills.

For all these reasons, third party processing should probably only be considered if other options are unavailable to your business. That said, there are definite advantages - not least the fact that third party processing is simple, fast and cheap to set up. Third party processors may also offer extra services, some of which are free-of-charge. Clickbank, for example, provides built-in affiliate software as standard.

Ultimately, the option that you choose depends very much on the nature, size and inherent risk of your business. However, by investigating the options in more detail, you will be able to make the best choice for your company, and minimize the costs of your online trading.

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