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By Karen E. Klein
JANUARY 25, 2000

The Credit-Card Processing Labyrinth: A Guide for Web Merchants

It's easy for newbies to get lost in the fees and options


E-Mail Story

The First Rule of Web Business: Let Them Order By Phone

You Can Accept Credit Cards without High Fees

Banks Make Merchant Accounts Tough to Get

Smart Answers Archive

Q: My husband and I plan to open up a business over the Internet, and we're trying to figure out how we can accept credit-card payments. We have searched everywhere but cannot figure out how it is done.
—C.I., Lakehills, Tex.

A: Your confusion is understandable. Hundreds of companies promise fast, easy, and sometimes even "free" credit-card processing. Sorting out the options can be a nightmare. "There's not a lot of transparency in the market. Many ventures are selling 'come here, and we'll do it all for you,' but then they nail you on fees," says analyst David Schatsky of Jupiter Communications, a New York City-based Internet-commerce research firm.

And fees there are in abundance. The middlemen who process these transactions take their cut off the top and at numerous points in each sale. The percentage of your sales that goes to processing fees will depend on your volume and what type of service you take. Be aware that initially, before you build much volume, monthly fees will take a large chunk.

If your priority is getting set up quickly, investigate "turnkey services" that cater to startups. They offer Web-site hosting, a custom-designed storefront, shopping-cart technology, and real-time credit-card order processing through a master merchant account. Such companies do all the work and take all the credit risk (you get periodic checks, minus fees and interest), so these packages can be costly. Expect some combination of monthly hosting fees (typically $39 to $199), transaction fees (from 10 cents to $3), and 6% to 15% of each sale. Yahoo! stores is one company that offers such services.

If you already have your own site, you can contract with a payment-gateway service that will help you apply for an Internet merchant account and will process your orders. Sites such as and Excite@Home ( offer build-your-own-site packages and let you add e-commerce to an existing Web site.

Others, such as, simply provide credit-card processing services. Some waive setup fees because they sell or lease the proprietary credit-card processing software you need, but most charge one-time fees ranging from around $95 to $295, as well as monthly leasing fees that can range from $39 to $100. Some also take a cut of each transaction, typically about 10 cents. Beware: Most long-term software leases (12 to 48 months) include noncancellation clauses. So even if your business fails, you'll be on the hook for the fees unless you can transfer the lease to someone else.

You'll also pay separate merchant-bank account charges. Expect to pay setup fees of up to $200, a monthly statement fee (typically $10), a per-transaction fee (around 30 cents), and a discount rate ranging from 1% to 4% of each sale. The latter is the interest the card company charges for giving you the money up front before it debits the customer's account. A discount rate (determined by your credit history) of less than 2.7% is considered good. Reserve fees — a portion of sales retained to cover refunds — can be as large as 15%. The bank can hold reserves for anywhere from several weeks to six months.

The list of potential fees is endless. Watch for charges for address verification — an optional service recommended for security reasons (10 cents to 30 cents per transaction) — charge-back or refund fees of around $25, and retrieval fees, which the card company charges if it has to investigate a disputed charge.

Have a question about running your business? Ask our small-business experts. Send us an E-mail at, or write to Smart Answers, BW Online, 46th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.

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