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SMART ANSWERS
By Karen E. Klein

4.29.99  
Banks Can Make It Tough — and Expensive — to Launch an E-Business
But intermediaries help you negotiate the credit-card processing labyrinth

Q: We're a small educational publisher revamping our Web site, and we'd like to add online ordering capability. In order to obtain a merchant account, our bank wants a large cash payment as a guarantee against invalid online credit-card charges. We cannot manage the amount. Our bank isn't the only one demanding such up-front payments. Another one we approached wanted $25,000. Are there companies that will accept credit-card and check payments on our behalf?
--C.B., Aurora, Ont. (Canada)

A: The short answer is yes. There are companies that will, in effect, become the reseller for your products and services, taking your online orders, maintaining your accounts, and selling your goods through their own credit-card merchant accounts. Some of the online merchant-service companies, such as ibill (www.ibill.com) and Multicards (www.multicards.com) offer this "turnkey" service as an option.

However, the commissions and fees for such arrangements can be steep. They can mount as high as 6% to 15% of sales, depending on how much you bring in. That's probably a lot more than the equivalent fees you'd pay the bank if you had your own merchant account.

One reason you're having trouble getting a merchant account is that some banks, especially outside large cities, still consider new Internet businesses to be extremely high-risk endeavors, and they don't really want to deal with them. Their normal policy may be to open merchant accounts only for bricks-and-mortar retailers in business for at least two years. Banks can exact those guarantees because they know you have few alternatives in some areas.

The good news is that even if your local bank is wary of E-commerce, there are other banks that do want Internet businesses as customers. And there are intermediaries that help you get such accounts.You apply online to these brokers, and they find a bank that will open a merchant account for you. The bank pays the broker's fees. If you look up "merchant accounts" at a search engine, you should turn up lots of leads. A few places to start are: www.electronictransfer.com, www.americancreditcard.com, and www.webtransaction.com/merchant.htm. Take the time to compare several deals, because fees and discount rates can vary widely. How much you pay the bank will make a big difference to your margin on sales.

Application fees, which banks charge in part for checking your credit, can range from $100 to $900, for instance. Discount rates — the bank's percentage on each credit-card sale — vary widely also. The 1.5%-to-2.5% range is considered good, but for Internet and mail-order companies, where you never see the customer, and the perceived risk of fraud is higher, some banks may charge up to 4.5%.

Other standard charges you ought to compare include: the authorization fee, usually 25 cents to 40 cents per transaction; the monthly statement fee, around $10 on average; and the monthly minimum — a $25 to $35 fee that some banks charge if the authorization fee and monthly statement fees don't add up to the minimum.

Once you have your merchant account set up, you'll have to decide how you're going to process your orders. You can do most of the work yourself, but it can be costly to purchase a secure server, where credit-card and other personal information is stored in encrypted form, or to lease space on one. You'll probably have to employ someone to track orders, as well.

Alternatively, you can pay a company to process transactions online for you. When someone buys from your Web site, the processor receives a copy of the order, verifies payment information, clears the customer to proceed, sends you and the buyer confirmation, debits the customer's bank account or credit card, and credits your account.

Many of these companies will help you find a good deal on your merchant account as well. They typically charge a one-time registration fee and either a fee for each transaction or a monthly minimum in the $30-to-$40 range for their services. Most of them will process checks as well as credit cards. A few of the E-commerce merchant-service companies on the Web are: www.iTransact.com, www.anacom.com, and www.cybercash.com. Valis International specializes in overseas companies that want to establish U.S. merchant accounts: www.valis.org. Again, compare services and fees, and make sure to check the fine print for hidden charges.

For more discussion and information about electronic payment systems, check out the E-Commerce Times newsletter at: ecommercetimes.com/product_guide/payment_systems. Another handy resource is the glossary of terms used in the credit-card business at www.ibill.com/glossary.html.

Have a question about running your business? Ask our small-business experts. Send us an E-mail at editors@businessweekmail.com, 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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