$39.95

By Stu Rosenbaum

"If you don’t read this report before getting a credit card merchant account it could cost you hundreds, or even thousands of extra dollars per year. Read this report right away, before getting a merchant account."

Harry was a computer reseller who sold products by phone order and retail. He saved enough money from his job as a computer technician to open up his modest business. After having been turned down by his bank, Harry was gratified when our company approved his merchant account. We were happy to have Harry as a client. Being a fairly new company back then (1993), we did not know all the things we could’ve done to help Harry fully benefit from his merchant account.

One day, out of the blue, Harry called me and told me that his account had been shut off. Not only was the account terminated, but Harry was informed of two disturbing facts: 1) Harry owed more than $10,000 in charge backs; and 2) His name and business had been added to the Visa and MasterCard Combined Terminated Merchant File (CTMF)- He therefore could not establish a new account with any bank or credit card processor. Harry was distraught. I spoke to him at length.

What happened to Harry happens to thousands of merchants each year throughout the US and the rest of the world. Harry was a victim of credit card fraud. Moreover, Harry was a victim of my ineptness as the sales manager of the company that provided Harry with his service. I didn’t warn Harry of the pitfalls of credit card processing nor educate him on the significant dos and don’ts associated with this service. You see, a merchant account for credit card processing is a service that should enable businesses like yours to add many new sales, increase the size of customer orders and

generally help your business prosper and grow. If used properly by an educated merchant these will

be the results. If the merchant is not aware of and does not avoid the important pitfalls that can be associated with this service- the merchant can lose much more than just the cost of the service. The story of Harry’s loss- is now your gain because it has prompted the writing and distribution of this report.

One day Harry received a call from a man that identified himself as a referral and potentially large customer. Harry was so exited to get new business that the thought of being set up or scammed never occurred to him. The man placed an order with Harry for computer hardware totaling more than $10,000, and assured Harry that if he was satisfied with the merchandise he would place several larger orders. Harry shipped the computers to the address provided. Not more than two weeks later Harry’s account was shut off, all of his credit card processing funds were held, he was added to the CTMF and was told he had to pay the processor over $10,000 for charge backs. Later, upon investigation, it was discovered that the caller actually called from a prison pay phone in upstate New York, calling Harry with stolen credit card numbers.

Today, 8 years later, I am the CEO of the very same company that established Harry’s merchant account. I have sworn an oath to do everything possible to prevent our clients from ever becoming victims like Harry. We can’t prevent all credit card fraud from happening to our clients, but we can greatly minimize it by educating our clients on the things they really need to know about credit card processing and how to protect themselves and benefit from the service.

When you accept a credit card from your customer, you do so at your own risk. Don’t be discouraged-- the benefits outweigh the pitfalls a thousand fold. When you accept a credit card for payment, your merchant-processing bank receives money from the customer’s card issuing bank and then sends that money to you. You believe that what you have received is your money- this simply is not true. What you have received is loan from the processor or the bank . You can keep the money as long as nobody asks for it back. That is how credit card processing works for you- the merchant.

Thankfully- most customers are basically honest. Not too many customers buy products or services with the deliberate intention to dispute the charge and avoid paying the bill. But it happens. Visa and MasterCard are comprised predominantly of card issuing banks. The rules have been established to protect these issuers and the consumer. There are rules to protect the merchant as well-- but there is more protection afforded to the consumer. In this report I will talk about some of the rules and pitfalls and what to do to avoid them, as well as how to use a merchant account and other transaction services to improve your sales and grow your business.

Charge backs are sales, which have been reversed either temporarily or permanently. Usually your bank or processor has taken back the money either by deducting the amounts from payments due you, or via direct access to your bank account. If no money is available- you will still owe it.

There are many possible reasons for charge backs. The most common and most avoidable is a failure to respond to a retrieval request. A retrieval request is a request for information about the sale- usually from the card-issuing bank. The information requested would be a copy of the credit card receipt and a copy of other documents associated with the sale.

Other reasons for charge backs include:

• Acceptance of lost or stolen credit card- known as an "Unauthorized Sale" – this was what occurred with Harry.
• Customer Service Dispute- the customer complains that they did not receive what they paid for. This could include faulty workmanship.
• Customer complaint of unauthorized sale, or amount.
• Unsigned sales draft.
• Undelivered product or service.

The information stored in this file includes the name of the business, address, principals’ name(s), home address, Social Security numbers, corporate tax ID number, phone numbers, web addresses, type of business, etc. When new processors or banks attempt to establish a merchant account for their client, all information is run through the CTMF. If any data matches, the account is held up for investigation. If the match is true- for example you had a previous business- unrelated to the current one- and your name and SS# are in the CTMF- you will not be accepted for an account- with very few exceptions that we’ll talk about later.

Occurrences that can cause one to be added to the CTMF are as follows:

• Laundering - This is a term used to describe a situation where one business processes transactions for another. Not only is this a violation of the merchant agreement, it is also in violation of federal and most state laws. When one merchant launders- accepts transactions for another merchant or business- it is easy to get caught. When the consumer receives their credit card statement the transaction will appear under the name of the merchant that ran the transaction- not the merchant that sold the product or service. This causes the consumer to dispute the transaction and will trigger an investigation of the merchant that illegally ran the transaction resulting in loss of merchant status, addition to the CTMF and no possibility of obtaining merchant services.

• Factoring - this occurs when a merchant runs their own credit card through their own merchant account, thus creating an illegal cash advance. The card data and merchant data create a matching file that results in an investigation and possible loss of merchant privileges and CTMF.

• Excessive charge backs - the term "excessive" is up to the bank or processor. Most banks and processors will only tolerate a 1% threshold; some may go as high as 3%.

• Excessive retrieval requests - these do not always result in a charge back. However, they are indicators that charge backs may be forth coming. The thresholds are similar to those allowed for charge backs.

• Excessive refunds - again this is up to interpretation by the bank or processor. Excessive refunds do not always result in the merchant being placed on the CTMF, however may result in a loss of merchant privileges as they also are an indicator of possible charge back risk.

• Excessive fraud, fraud target - the merchant may have no intention to commit fraud and is not a party to the fraud, however his business is a fraud target. This creates a risk to processors, banks and the merchant. This category will result in placement on the CTMF. Merchants must understand that they are responsible for taking all measures to prevent fraud. Choosing the right processor or bank that is proactive in helping reduce fraud is critical.

• Falsified information on merchant application - Be careful here and ensure all blanks are filled in and correct before you sign the application. Sometimes over-zealous sales representatives can misstate information about your business, estimated processing volume and average transaction size. If you are not exactly sure because your business is new, make sure the word (estimated) is written in conjunction with volume and transaction size representations about your business.

• Failure to pay merchant fees - if you do not pay your agreed upon processing fees you can be placed on the CTMF. This is sometimes handled by paying the fees plus any penalties.

• Merchant fraud - any fraud committed on the part of the merchant such as willfully charging a stolen card, double charging the client, purposely charging for unauthorized sales, etc., will not only result in loss of merchant privileges and CTMF but will most likely result in criminal prosecution.

• Violation of the terms and conditions of your merchant agreement may also lead to placement on the CTMF.

The above summarizes the key reasons why a merchant might be placed on the CTMF. Again, it’s important to choose a processor that will be proactive in educating you and looking out for your interests.

RULE #3 Minimize Costs by Lowering Risks in Your Business

There are many things that you can do as a merchant to avoid or minimize risk in your business. These are extremely important issues to understand before you apply for a merchant account. In cases where the bank or processor views your business to be too risky- you may not be able to obtain the service at all, or you may obtain the service at a costly premium. The following is not just food for thought but urgent recommendations for your business:

A lot of money can be wasted in printing brochures and advertisements if you are depending on accepting credit cards and you are denied the service. I have witnessed companies that have poured thousands of dollars into a marketing campaign only to find out that their service, product or method of sale was too risky, and therefore they could not establish a merchant account.

More importantly- you may be able to establish the account if certain terms are modified or certain business practices are altered. Why print the materials when you may have to print them all over again. Let me be more specific…

Some companies offer a service such as a lifetime membership or annual subscription. This may sound like a great opportunity to the merchant, but represents an unlimited liability to the bank or processor and the merchant. Here’s why- suppose you marketed a lifetime membership for an association that you formed. You charged a $300 lifetime fee. Now a year later you decide that the business isn’t working out so you want to close it. Remember, you sold a lifetime membership to your clients. If you close down you have failed to deliver what you sold the client. The client could dispute the charge and would win the dispute for the full amount in a charge back regardless of how old the sale. Even if the business no longer exists- you would personally be required to repay the money-if you personally guaranteed the merchant agreement, (which most business owners are required to do). If you can’t pay, or declare bankruptcy against the liabilities of chargebacks, the bank or processor has to pay the card issuer back.

In all cases, banks and processors will want to see your ads and marketing materials before they establish an account. The best approach is to forward copies or samples (before printing quantities) along with a note explaining that terms can be changed based on the bank’s acceptance criteria. Any offer of a product or service which has future or ongoing delivery or service connected with it represents a greater liability to you and the processor or bank.

High priced items such as jewelry, computers and electronics are targets for fraud. If your business includes selling these items by telephone, mail order or Internet, then use a fraud screening service and address verification software.

A fraud screening service rates the risk of the transaction by several parameters including to where you are shipping, known charge back history of the card being used and other parameters. Address verification software enables you to determine that the shipping address matches the cardholder’s address and greatly minimizes the chances of receiving a fraudulent transaction. Both of these services are usually available through your credit card processor.

If you are accepting cards face to face with the client in a retail environment, always check the card number that prints on the receipt with the one embossed on the credit card. There are many fraud schemes throughout the US where the magnetic strip has been re-encoded with stolen card information, and does not match the embossed number on the front. If you accept a transaction of this type, you will surely suffer a charge back of that sale.

Some magnetic strips can become demagnetized or worn out to the point that your credit card terminal may not be able to read data from the strip. In this case you would manually enter the card information by using the terminal keypad. When this happens, check the ID of the presenter to ensure that their name is the same as the name on the card. Occasionally fraud is perpetrated by presenting fake cards where no data actually exists on the magnetic strip, and the numbers embossed on the front of the card are stolen numbers. Even if you heard that you are not supposed to require ID for a credit card transaction or the client complains to you- trust me- in this case verify the ID, or don’t accept the transaction.

RULE #4 Choose a Bank or Credit Card Processor that is Proactive in Handling Charge Backs

When selecting a service provider (bank or processor) ensure that they are proactive in handling charge backs. Service Providers are required to notify you by mail in the event of a charge back or retrieval request. However, some do so slowly which may reduce your window for disputing the charge back. Really good service providers will notify you quickly not only by mail but will also fax, email and/or call you in an effort to help save you from a costly charge back.

If your business is risky in nature, choose a service provider that can manage the risk. Oftentimes banks and sometimes service providers are risk adverse. They may initially accept your account, but at the first sign of trouble they’ll shut the account off and hold your funds.

It’s important to know that you are establishing a relationship with a company that knows and has experience with your type of business. If the service provider is not proficient in managing fraud and preventing losses- then losses incurred by that company from other merchants may result in higher fees or "emergency fees" charged to you.

RULE #5 Keep a Good Filing System

Keep a good filing system for your copies of credit card receipts. If you receive a retrieval request you will need to provide a copy of the receipt to your service provider. If you do not provide a copy within the specified time frame, you will receive a charge back with NO POSSIBILITY of reversal. If you have a high volume of retail transactions, request a service called signature or receipt capture, if available. This service will allow you to store images of receipts for easy retrieval when needed later.

RULE #6 Read the Contracts Before Signing

There are many fees associated with credit card processing. Most are valid and necessary. But you want to know what the fees are, as well as terms, whether or not you are locked in for a long period of time, cancellation penalties, charge back procedures, thresholds, and general do’s and don’ts of the contract. If you do not read the contract you will be surprised when the bill comes.

RULE #7 Do Not Assume that Cheaper is Better

This is very important to understand. Why do you pay more for a Lexus than a Toyota? There are obviously some important differences. Same with selecting a credit card service provider. Remember-these companies will be handling your money. The difference between the cheapest provider and one more moderately priced could be the small difference in price that costs you big dollars in time and hassle . Any company that has to be the cheapest to get your business has to cut corners somewhere. Those cut corners will include increased hold times for customer service issues, lack of assistance in managing charge backs, delays in equipment and service warranties, inaccurate billing statements, lost transactions and many others that will ultimately make the "cheapest" deal actually be the most expensive by a large margin. Also- beware of companies that offer the "Lowest Rate" and then place in the fine print that the rate is only for an introductory period . Check your statements for rate increases without notification to you.

Basically, there are two types of accounts that service providers can establish for you. Card Present and Card Not Present. Card Not Present transactions are riskier and therefore more expensive to establish, with higher rates. More fraud occurs with Card Not Present accounts. Your application for services would have required you to disclose whether your transactions would be Card Present or Card Not Present. If your account was set up for Card Present transactions and you perform several manually entered transactions, you may lose your processing privileges, or sustain significant surcharges for the manually entered transactions.

RULE #9 Call Your Clients before Shipping

If you sell by telephone, mail order or Internet and ship products valued over $100, it is highly recommended that you call the client before shipping and verify the order again, ensuring that the transaction was not a fraudulent or unauthorized one.

RULE #10 Call Your Service Provider if You’re Going to Exceed Your Limit or Average Ticket Size

Up to now, I have told you some of the ways to lower your costs by minimizing risks. Now it’s time to look at ways that a credit card merchant account can make you money.

Take all of them: Visa, MasterCard, Discover, American Express- and even Diner’s and Carte Blanche, if available. Don’t believe the commercials that say, "And they don’t take American Express!" There are over 30 million American Express Card holders in the US, and the average American Express transaction is nearly twice that of the other cards. The first time you refuse someone’s card, may be the last time you see them. The famed author of "Guerilla Marketing" – Jay Conrad Levinson said in his book, "Take credit cards- all of them".

When attempting to finalize the sale with your client, simply ask the alternative closing question: "Will that be cash, check or charge?" It worked 20 years ago and still works today.

When the client indicates that they will use a credit card, you have twice as much possibility of upgrading the sale over cash or check buyers. Always offer an upgrade or accessory to the sale once this has been determined.

Let your clients know that you accept all cards by placing logos on store windows, counters, and most certainly in yellow page or other ads.

If you have products that can be sold on the Internet then you should have a site with a separate merchant account (from your retail business if you have one). Accept transactions on-line using a payment gateway provided by your service provider. Some service providers even provide a turnkey solution for e-commerce at a reduced rate if you have your merchant account with them. Be sure to ask for one. Display your web address on all your ads and marketing materials- including your storefront window.

Even though you pay a fee for accepting credit cards, do not offer a discount for cash and certainly never charge a fee for using the credit card. These will offend credit card buyers and reduce their patronage to your business.

ATM cards generally cost less than credit cards to accept. There are fewer disputes with ATM Cards. You may need to invest in more equipment and some monthly fees- but one sale usually pays for that. Accept checks but if you are concerned about getting bad checks- use a check guarantee service. Your service provider will usually provide that service as well. The fees are about the same or sometimes less than credit card fees. When determining your retail prices, include a mark up for these costs. Now, by accepting all forms of payment, you never have to say "no" to a customer.

There are now services that enable you to accept checks on the Internet. There are even services that will guarantee the funds for you. Remember, the more methods of payment you offer- the more sales you’ll make.

I have been in many stores that accept credit cards and ATM cards. In many cases, these stores are paying thousands in additional fees because of untrained clerks.Here’s why. A credit card transaction will require that the merchant pay discount fees. A discount fee is the percentage that a merchant pays for each credit card sale. In addition to discount fees, there is usually a transaction fee charged as well. With most ATM card transactions there are no discount fees- only transaction fees. Accept the transaction as an ATM card sale and save money- here’s an example:

1.75% discount fee (example only), and a

$0.25 transaction fee

$0.35 transaction fee (only).

Most service providers charge application fees. $25 to $95 is reasonable, above that is not. Ensure that the service provider has a policy of refunding your fee if you are not approved for the account.

Stu Rosenbaum has been in the merchant account business for over ten years. During that time, he has seen accounts from nearly every industry. He has helped countless merchants--Big, small, young and old. He has seen the good, the bad and the ugly.

Stu is an entrepreneur who started U.S. Merchant Systems, Inc. in 1992 with two partners and $1,000. Today, they have grown this business into one of the industry leaders.