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Managing Credit Cards and Cash Flow

Accepting online credit card payments requires three critical services:

• a transaction clearinghouse: This is a business whose job is to verify that a credit card number presented for payment is valid and that the owner has sufficient credit on the card to pay for the item selected.

• a gateway to the clearinghouse: For online businesses, this is merely software that you install that typically sends the user's credit card information to the transaction clearinghouse in real time. It returns an approval within seconds.

• a bank account: Online merchants require an account in which to deposit receipts as well as withdraw amounts to be refunded in case of disputes or non-fulfillment.

Merchant Accounts and Credit Card Processing
A likely scenario when you set up credit card processing with your bank is that they will agree to process your credit card payments. For banks that aren't set up for this, check with your bank to see if they have a designated transaction clearinghouse.

If your merchant bank doesn't process credit card payments, you may be able to set up the service using an ISO (independent sales organization). In return for a one-time fee, the ISO will set you up with a bank that does the credit card processing.

Application fees, set-up fess, software and broker fees can add up to almost $1000. Be aware that banks usually work only with Master Card and Visa. As a result, you have to apply separately for American Express, Discover, Diner's Card and other credit card companies.

Third Party Services
The internet is replete with credit card processing service companies that compete with banks for your business. With all of these choices, of course, comes the difficulty of choosing the best service for your needs.

Pricing itself is complex. Many third party processors charge a percentage of each transaction, as well as a fixed rate per transaction. However, they don't charge set-up or application fees. The fixed rate per transaction is to discourage you from multiple small charges of one or two dollars. For example, you might pay 2.5% of the transaction plus a flat charge of 25 cents. A competitor might take only 2.3% and a charge of 15 cents per transaction, but add on a flat fee of $5 a month.

Some vendors hide their charges from casual visitors to their web sites. Vendors that require potential customers to fill out a form before they quote a price make it harder for you to comparison shop. Beware of sites that claim to evaluate third party services and promote only one or two services without comparing their prices up front. Worse yet, some sites carry ads for services and fail to identify their credentials.

You can expect third party services to provide free shopping cart software. Some vendors recommend that you buy a particular brand, so factor the cost into the charge for their services. Also, some make a big deal of their security system. All vendors should have SSL or some comparable and reputable encryption to protect your customers' credit card information. Make a point of checking the security guarantees and avoid working with companies that promote their own security schemes.

Credit card processing should include regular summary reports, assistance with the computation of shipping costs and sales tax, and a clear disclosure of chargeback fees. A chargeback occurs when a customer returns an item, claims that the item wasn't received or that it was damaged, or when a dispute arises. Credit card processors, including your bank, charge vendors an additional fee for returning the customer's money.

Collecting Your Payments
While it's tempting to rake in the cash and trust the bottom line in your bank account, you have to take precautions and do some careful accounting to prevent nasty surprises.

• Keep careful records of customer orders so you can tell which items have been ordered and which have been shipped. Although the customer's credit card account has been checked, the amount of the payment is encumbered but not disbursed until final settlement. This settlement, the actual charge to the credit card, should never be initiated until you've shipped the item.
• Pay your vendors and drop shippers directly. It's against the law to submit your customer's credit card information to a third party so he or she can collect directly from your customer. This is called factoring. In some states, factoring is a felony.
• Decide how you're going to process receipts from gift cards, if you issue them. You could suddenly find yourself shipping hundreds of items that were prepaid almost a year ago.
• Prepare yourself for a wave of chargebacks if an item should prove to be unsafe or defective, or if it's often damaged during shipping. Not only will your merchant account be charged for the amount of the original sale, but you'll be hit with a chargeback fee for each item.
• Check your bank statements and reports to make sure that they're accurate. You should be able to forecast monthly sales from these reports and discontinue items that aren't selling well.

Ideally, your online business will thrive and customers will happily submit their credit card information, rave about the product and the prompt delivery, and return to buy more in the future. Your bank account will swell with profits and your business expenses will be a tiny fraction of your receipts.

Along the way, be prepared to handle exceptions to the rule, as well as your standard methods of procedure.

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