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May 1, 2004

7 Min Read
Merchant Accounts 101

Business owners know they need to accept credit cards. But often, the things they dont know about merchant accounts can cost them money on every transaction. Typically, they sign up with their bank or the high-pressure salesperson who magically appears as their business is preparing to open. But they can benefit from understanding more about how the procedure works, which processing solution is correct for their businesses, and where to go for service.

Self-storage owners have one of the most misunderstood and overlooked business types in the bank-card industry; because they use both types of merchant accounts in one business, the opportunity to maximize their profits is twofold. Hopefully, the information that follows will provide the information they need to look a step ahead and save time, money and frustration with bankcard processing.

How Transactions Are Processed

When a credit-card transaction is made, the terminal or software contacts the processing bank via a platform. The processing bank contacts the card-issuing bank to determine if the account has the balance available to authorize the transaction. If the funds are available, they are placed on hold for a period of time, usually 24 hours. The processing bank tells the terminal or software the transaction is authorized, but no money moves at this point. At the end of the day, the terminal or software batches or settles, and the processing bank makes payment to the merchant on the authorized transactions contained in the batch.

Most processors break down Visa and MasterCard transactions into three categories:

  • QualifiedA standard Visa or MasterCard is swiped through a terminal or magreader and batched within 24 hours.

  • Mid-qualifiedA standard card is keyed into a terminal or software using AVS (an address-verification system), or a corporate card is swiped.

  • NonqualifiedA standard card is keyed in without AVS, a corporate card is keyed in, or a transaction is not batched or settled in 24 hours.

Mid-and nonqualified transactions are more expensive than qualified ones because of their increased risk. American Express and Discover offer different rates than Visa and MasterCard. Their rates are based on business type, average ticket and whether the transactions are swiped or keyed. These companies do not offer mid- or nonqualified transactions, and they deposit separately from Visa and MasterCard transactions.

Managing Risk

Risk is a major factor in merchant accounts and bankcard processing. It begins with the application process, when the underwriters review the paperwork and determine if the processing bank will accept the new client. Self-storage facilities are low-risk businesses.

Risk is also involved in the transaction process. Different transaction methods and card types increase risk to the processing banks. Swiped transactions present the lowest risk because there is electronic proof that the card was present and the identification of the cardholder could be verified. Corporate cards are considered higher risk because the cardholder is not the person ultimately responsible for paying the charge. Keyed transactions bring the highest risk because the card is not present, and it is extremely difficult to verify the identity of the person making the transaction.

Finally, risk is involved after a sale. Visa and MasterCard transactions can be disputed up to 180 days after the transaction. This dispute can result in a chargeback. For a chargeback to occur, the customer calls the card-issuing bank and answers a series of questions regarding the transaction. If the bank finds sufficient reason to reverse the charge, it becomes a chargeback. Selfstorage facilities are fairly chargebackproof. A customer knows he did business with you because he put his things in your unit and signed a rental agreement. There is no shipping or future delivery involvedits usually pay as you go. Just make sure that once a customer moves out you do not continue to charge his card.

Types of Merchant Accounts

There are two basic types of merchant accounts, based on how transactions are processed. The first type is known as retail, card present or swiped. These accounts obtain all necessary information for the processor from the magnetic stripe on the credit card. They are the least expensive accounts because they present the lowest risk; the processing bank knows the merchant has had the opportunity to verify the cardholders identity by checking the drivers license or other photo ID and matching the signature on the card with the one on the ticket. Self-storage facilities are usually able to swipe transactions because the client is on site to store his belongings and sign an agreement.

The second type of merchant account is called MOTO (mail order, telephone order). With this type of account, a card is not present, and the number is keyed. Most processors insist on this type of account for organizations that do not swipe at least 70 percent of their transactions. All websites fall into this category. These accounts are slightly more expensive because the transactions start out mid-qualified and involve higher risk. The security information in the magnetic strip is not sent to the processor; signatures are not obtained at the time of the sale; and photo identification is not available to verify the cardholder. Because the processing bank knows most of these transactions will be mid-qualified, it gives the business a higher discount than it gives the retail account.

Which Is Right for You?

In the months following a first transaction with a tenant, a self-storage facility usually keys in the transactions or uses the automated billing in its software program, which sends the information as if it were keyed. In a perfect world, all storage facilities would have both types of merchant accounts to maximize the savings available. Unfortunately, most terminals and software programs only hold one merchant account, requiring additional equipment, time for data input and accounting.

So which type of account is best for your facility? There are several important factors to consider: turnover rates, equipment or software used, average ticket, and total processing volume. Most storage facilities actually save money by setting up a MOTO account. Even though they pay a little more for the first transaction, the money they save during the following months makes up the difference. One operator saved more than $1,000 a month in fees by changing from a swiped to a MOTO account.

The biggest factor in the battle of terminal vs. software is usually the cost. Although costs for both have dropped significantly in the last few years, terminals are still the least expensive way to process credit-card transactions. Some noteworthy terminal features include a built-in Smart Card reader and PIN pad, a thermal printer, the ability to support current state and federal regulations, and an ethernet connection. When shopping for processing software, consider purchasing one that supports AVS, does recurring (automatic) billing, and is certified for DSL or cable-modem transactions with most processors. These features will allow you to save time, reduce mistakes and ensure customer satisfaction.

Service Providers

The last piece of the merchant account puzzleand the most importantis the service provider. This company will be responsible for making sure you receive a significant percentage of your revenue. Independent sales organizations and merchant services providers all work from the prices set by Visa and MasterCard, called Interchange.

When choosing a provider, you should consider many factors beyond rates:

  • Does the provider offer a personal account manager who knows you and your business, or does it give you a 1-800 number through which they will not talk to you unless you know your merchant-ID number?

  • Is the provider registered with Visa and MasterCard?

  • Can the company provide knowledgeable technical support for the terminal or software you are using?

  • Does the provider have references in your industry?

Now that you have advanced your education in merchant accounts, what is the next step? Consult a qualified professional about your current statements or the project you are opening. Ask a lot of questions, and have him review your set-up to ensure you are not wasting money on unnecessary fees.

Scott Lewis is the accounts director for National Bankcard Systems (NBS) in Austin, Texas. NBS is a registered ISO for Fleet and Regions Banks, and handles merchant accounts for six of the largest processing banks in the country. For the last two years, the company has been ranked on the INC. 500 list of fastest-growing, privately owned companies. For a free analysis of your merchant-account processing statement or more information, call 800.823.6835.

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