OCTOBER 2005VOL. 18, ISSUE IX

Reprinted by permission of the St. Louis Small Business Monthly

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Improving Cash FlowBy Accepting Debit And Credit Cardsby Steve Hazan

One of the fastest-growing methods of pay-ment is the use of debit and credit cards. Asthe reliance on paper checks continues towane, more and more businesses are turningto merchant providers to take advantage ofthis trend. Accepting this form of paymentmakes it easier for people to do business withyou and expands the ways in which to sellproducts and services. Smaller businessesgain a certain implied credibility with potentialcustomers by being linked to major players,such as Visa, MasterCard, Discover or Ameri-can Express. Furthermore, purchasers aremore apt to do business with unfamiliar ven-dors when they know they have the variousprotections afforded by using plastic in theevent of a dispute.

How Does It Work?Your customer presents the card for pay-

ment, which may be accepted over the phone,through a personal computer or swipedthrough a point-of-sale terminal linked to theprovider’s database. The processor verifiesthe validity of the card and the availability offunds. Assuming good funds, the transactionproceeds and the sale amount is debited fromthe customer’s account for transfer to yours.Transaction reports are available and import-ing data directly to your accounting systemcould result in less data entry time on yourpart.

Within a few days the sale amount, minus asmall discount fee, is credited to your account.Many users focus solely on the amount of thediscount. Rates and fees are generally deter-mined by volume and average ticket size.Higher transaction amounts are more lucra-tive and warrant a lower cost; however, theycarry greater risk for the provider. While thediscount rate may vary quite a bit, there are a

variety of fees and charges to consider. Makesure to do an “apples to apples” comparison toarrive at the true all-in cost of doing businessthis way. Typically funds are advanced dailywith settlement of charges occurring on amonthly basis. Although you may bristle at thethought of paying for this service, the positiveimpact on cash flow and the security of know-ing good funds are on the way usually offsetthe costs.

As more business is conducted over theInternet, look for a vendor who can help youwith the back end of your ordering website.Some provide easily customized templates, whileothers will create a true end-to-end orderingsystem for you. The ubiquitous “shoppingcart” pioneered by Amazon is considered stan-dard fare today. While you can save directcosts by creating your own site, many ownersprefer to outsource this activity allowing themto focus on other facets of running their busi-nesses. Other key considerations include pri-vacy and security protection provided by manyvendors.

Impact To Your Cash FlowAnother significant factor is the availability

date. Some processors credit you after two orthree business days. Each day’s delay impactsyour cash flow, so consider those providerswith next day availability. If your bank pro-cesses its own transactions, you can often getfunds as much as one or two days sooner thanthrough third party providers. Regardless of aprovider’s payment policy, your commitment todaily settlement of card transactions will im-prove your cash flow.

Who Are The Players In This Field?The three types of vendors to consider are

bank-owned processors, third party providersand independent sales organizations (ISOs)—

each with their own pros and cons. Bank-owned merchant providers, such as Fifth Thirdand Bank of America, are often able to providefaster settlement in addition to potentially lowerfees due to the in-house structure they offer.Business owners may also take advantage ofthe “one-stop shop” relationship managermodel offered by many banks. Banks reporthigher average deposit balances for those whoutilize merchant services vs. those without. Besure to offer this piece of business while nego-tiating your total package of banking services,particularly if you are currently with anotherprovider.

In the third party model, institutions contractwith a firm such as First Data to deliver the back-end support for card processing. In this dy-namic the bank continues to offer the benefitsof accepting a card, making the back-end sup-port transparent to the customer. While com-petition is fierce, those employing this modelmust cover contracted fees as well as providea margin of profit resulting in potentially higherfees and charges.

While generally smaller in size than their bankor third party counterparts, ISOs, play an im-portant role in the industry by helping thosewho might not otherwise have access to theseprograms. Although sometimes pilloried bycompetitors and consumer groups for high feesand questionable practices, traditional provid-ers often make it difficult for startups and thosein certain industries to establish these relation-ships. While ISOs have accepted their statusas a provider of last resort, there are manyreputable outfits that compete head on withtheir better-known bank brethren.

What Else Do I Need To Know?Whichever route you choose, expect to un-

dergo an underwriting process not unlike a loanapplication. In essence, the provider is advanc-

Reprinted by permission of the St. Louis Small Business Monthly

ing funds to you and taking the risk that a) yourcustomer will pay, and b) that you are stillaround to pay monthly charges. Be preparedto submit tax returns, financial statements andknow that a strong personal and/or businesscredit history is viewed favorably. Other fac-tors include average ticket size, volume ofactivity and industry type. Startups or mar-ginal businesses may be subjected to a siteinspection, or to daily settlement of charges.Assuming no underwriting challenges, set upsare usually activated with a week of applica-tion.

A final concern is the provider’s chargebackpolicy. If the nature of the business or your lackof quality control result in a preponderance ofcharge backs, your provider may cease to dobusiness with you. Chargeback rates higherthan 20% of transactions or a sudden spike insuch activity, raises red flags and may result inan investigation that could lead to higher fees,delayed settlement or ultimately the termina-tion of service. Once shut down, it will be verydifficult to establish a relationship with an-other provider.

Faced with myriad options, business ownersneed to balance fees, impact to revenue, con-tract terms, service, ease of doing business,and availability of a local contact to evaluatewhether or not accepting credit cards makessense for their individual situation. Be sure tocompare several offers to determine which onebest meets your specific requirements.

Steve Hazan, (steve.hazan@bankofamerica.com) CTP is senior vicepresident of treasury management at Bankof America, St. Louis, Mo.