1. OCTOBER 2005VOL. 18, ISSUE IX
Reprinted by permission of the St. Louis Small Business Monthly
Page 2
Improving Cash Flow
By Accepting Debit And Credit Cards
by Steve Hazan
One of the fastest-growing methods of pay-
ment is the use of debit and credit cards. As
the reliance on paper checks continues to
wane, more and more businesses are turning
to merchant providers to take advantage of
this trend. Accepting this form of payment
makes it easier for people to do business with
you and expands the ways in which to sell
products and services. Smaller businesses
gainacertainimpliedcredibilitywithpotential
customers by being linked to major players,
suchasVisa,MasterCard,DiscoverorAmeri-
can Express. Furthermore, purchasers are
more apt to do business with unfamiliar ven-
dors when they know they have the various
protections afforded by using plastic in the
event 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 swiped
through a point-of-sale terminal linked to the
provider’s database. The processor verifies
the validity of the card and the availability of
funds. Assuming good funds, the transaction
proceeds and the sale amount is debited from
the customer’s account for transfer to yours.
Transaction reports are available and import-
ing data directly to your accounting system
could result in less data entry time on your
part.
Within a few days the sale amount, minus a
smalldiscountfee,iscreditedtoyouraccount.
Many users focus solely on the amount of the
discount. 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, they
carry greater risk for the provider. While the
discount rate may vary quite a bit, there are a
variety of fees and charges to consider. Make
sure to do an “apples to apples” comparison to
arrive at the true all-in cost of doing business
this way. Typically funds are advanced daily
with settlement of charges occurring on a
monthlybasis. Althoughyoumaybristleatthe
thought of paying for this service, the positive
impact on cash flow and the security of know-
ing good funds are on the way usually offset
the costs.
As more business is conducted over the
Internet, look for a vendor who can help you
with the back end of your ordering website.
Someprovideeasilycustomizedtemplates,while
others will create a true end-to-end ordering
system for you. The ubiquitous “shopping
cart”pioneeredbyAmazonisconsideredstan-
dard fare today. While you can save direct
costs by creating your own site, many owners
prefer to outsource this activity allowing them
to focus on other facets of running their busi-
nesses. Other key considerations include pri-
vacyandsecurityprotectionprovidedbymany
vendors.
ImpactToYourCashFlow
Another significant factor is the availability
date. Some processors credit you after two or
three business days. Each day’s delay impacts
your cash flow, so consider those providers
with next day availability. If your bank pro-
cesses its own transactions, you can often get
funds as much as one or two days sooner than
through third party providers. Regardless of a
provider’spaymentpolicy,yourcommitmentto
daily 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 providers
and independent sales organizations (ISOs)—
each with their own pros and cons. Bank-
ownedmerchantproviders,suchasFifthThird
andBankofAmerica,areoftenabletoprovide
fastersettlementinadditiontopotentiallylower
fees due to the in-house structure they offer.
Business owners may also take advantage of
the “one-stop shop” relationship manager
model offered by many banks. Banks report
higher average deposit balances for those who
utilizemerchantservicesvs.thosewithout. Be
sure to offer this piece of business while nego-
tiating your total package of banking services,
particularly if you are currently with another
provider.
Inthethirdpartymodel,institutionscontract
withafirmsuchasFirstDatatodelivertheback-
end support for card processing. In this dy-
namic the bank continues to offer the benefits
of accepting a card, making the back-end sup-
port transparent to the customer. While com-
petition is fierce, those employing this model
must cover contracted fees as well as provide
amarginofprofitresultinginpotentiallyhigher
fees and charges.
Whilegenerallysmallerinsizethantheirbank
or third party counterparts, ISOs, play an im-
portant role in the industry by helping those
who might not otherwise have access to these
programs. Although sometimes pilloried by
competitorsandconsumergroupsforhighfees
and questionable practices, traditional provid-
ersoftenmakeitdifficultforstartupsandthose
incertainindustriestoestablishtheserelation-
ships. While ISOs have accepted their status
as a provider of last resort, there are many
reputable outfits that compete head on with
their better-known bank brethren.
What Else Do I Need To Know?
Whichever route you choose, expect to un-
dergoanunderwritingprocessnotunlikealoan
application. Inessence,theproviderisadvanc-

2. Reprinted by permission of the St. Louis Small Business Monthly
ingfundstoyouandtakingtheriskthata)your
customer will pay, and b) that you are still
around to pay monthly charges. Be prepared
to submit tax returns, financial statements and
know that a strong personal and/or business
credit history is viewed favorably. Other fac-
tors include average ticket size, volume of
activity and industry type. Startups or mar-
ginal businesses may be subjected to a site
inspection, or to daily settlement of charges.
Assumingnounderwritingchallenges,setups
are usually activated with a week of applica-
tion.
Afinal concern is the provider’s chargeback
policy. Ifthenatureofthebusinessoryourlack
of quality control result in a preponderance of
charge backs, your provider may cease to do
business with you. Chargeback rates higher
than 20% of transactions or a sudden spike in
suchactivity,raisesredflagsandmayresultin
an investigation that could lead to higher fees,
delayed settlement or ultimately the termina-
tionofservice. Onceshutdown,itwillbevery
difficult to establish a relationship with an-
other provider.
Facedwithmyriadoptions,businessowners
need to balance fees, impact to revenue, con-
tract terms, service, ease of doing business,
and availability of a local contact to evaluate
whether or not accepting credit cards makes
sense for their individual situation. Be sure to
compareseveralofferstodeterminewhichone
best meets your specific requirements.
Steve Hazan, (steve.hazan@
bankofamerica.com) CTP is senior vice
presidentoftreasurymanagementatBank
of America, St. Louis, Mo.