What to Look For in a Credit Card Processor

When you're ready to think about accepting credit cards, chances are you'll turn to your bank to process the transactions. It's a logical choice, but your bank may not provide the service or be willing to offer it to you if it considers your business too risky.

Banks are cautious about providing merchant accounts to small businesses — particularly mail order and home-based businesses — for fear money won't be there to cover disputed charges or returned merchandise. They're also concerned about potential fraud and abuse.

Although banks have historically provided the service, about 85 percent of credit card transactions now go through credit card processing companies, according to the Electronic Transaction Association. A credit card processor essentially stands between your business and the bank where your merchant account is located.

Fees Can Vary
Be warned: The prices and the types of fees charged can vary dramatically from processor to processor. The bulk of charges typically come in the form of the "discount rate" — a regular percentage charged on each transaction. There may also be flat transaction fees.

A processor that offers a low discount rate may look to make money elsewhere, from bloated application fees to statement fees. For instance, one processor charges $69 per month for a three-year lease of the standard credit card processing terminal. Others sell the same equipment for a one-time charge of $250.

What to Look For
Look for companies with well-established track records and solid reputations. This is the best way to avoid scam artists trying to take advantage of the explosion of e-commerce. It's also critical to compare pricing from at least three processors before making a final choice. Be sure to compare all the fees the processor charges, not just the discount rates.

Credit card processors' discount rates start as low as 1.5 percent, but they can go as high as 5 percent. Fee schedules tend to be geared toward individual merchants' average transaction figures and the number of monthly transactions.

Fees can add up quickly, particularly if your business does small volumes of inexpensive items. Find out if a processor has a minimum monthly charge and make sure the additional credit card sales justify the expense.

Finally, find out whether the processor allows you to use your existing bank account or whether it requires you to set up a merchant account with its own bank. Most processors are willing to deposit funds to any bank. Be sure the one you select will do that.