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Types of Accounts 
Benefits of Accepting Plastic
Frequently Asked Questions
Introduction to Merchant Services
Debit card use exceeds Credit card
use
Benefits of Online Debit
Choosing the Right Company
Get it in Writing
Dear New or Prospective Credit
Card Merchant:
You are a new or prospective merchant who is excited about the
opportunity to accept credit cards as payment for the goods and
services you provide. You are probably thinking that this opportunity
will make it easier for your customers to pay you, open other avenues
of marketing and selling (e.g. the Internet), and protect you from
the hassles and risks of bad checks. You are right - it can do all
of this. However, accepting credit cards for payment carries with
it some responsibilities, and is not entirely risk free to you,
the merchant. (There is no free lunch!). This white paper is intended
to provide you with some important information regarding:
- How the credit card system works,
- Some things to watch out for, and
- Your responsibilities as a merchant.
Your customer, the "Cardholder",
obtains his/her MasterCard or Visa credit card from a bank. The
bank is called the "Issuing
Bank" since it is the bank that issues the card to the
Cardholder. (American Express and Discover work a bit differently,
but the principles in this white paper apply to these card types
too!). You, the Credit Card Merchant, obtain your "Merchant
Account" from a "Sponsoring
Bank", sometimes called an "Acquiring
Bank" or "Merchant
Bank". It is called a Sponsoring Bank because the bank
is sponsoring you, the Credit Card Merchant, as a business that
is qualified to accept credit cards. Your Sponsoring Bank typically
uses a "Processor"
such as FIRST-TRANS to acquire the credit card transactions from
you and process them through the bank system.By giving a credit
card to a Cardholder, the Issuing Bank is granting the Cardholder
the rights to borrow money from the Issuing bank (up to a "Credit
Limit") for the purposes of purchasing goods and services from
a bona fide Credit Card Merchant such as yourself.
When you, as a Credit Card Merchant, want to accept a credit card
for payment of your goods and services, you first submit an authorization
transaction to your Processor (e.g. FIRST-TRANS).
Your Processor accesses the Visa/MasterCard network to communicate
the authorization transaction (containing a "Transaction Amount")
to the Issuing Bank to ensure that the credit card is valid and
that the Transaction Amount does not exceed the Cardholder's credit
limit. The authorization transaction also puts a "hold"
for the Transaction Amount on the Cardholder's credit limit. That
way, the funds are available to you when you submit the corresponding
"Deposit" transaction.
If the authorization succeeds, and you subsequently (or at the
same time) submit the Deposit transaction, you are informing (in
effect promising) your Processor, your Sponsoring Bank, and the
Issuing Bank that you are prepared to deliver to the cardholder
the goods and services that are expected by the cardholder, and
that you wish to receive payment for these goods and services from
the Issuing Bank.
Your Processor (e.g. FIRST-TRANS), based on your Deposit instruction,
then again works within the Visa/MasterCard network to request the
Issuing Bank to deposit the "Net Settlement Amount" (i.e.
the "Transaction Amount" less the "Discount Amount")
into your bank account at your Sponsoring Bank.The Discount Amount
(i.e. the Discount Rate times the Transaction Amount) and other
fees, such as transaction fees, are used to pay the various entities
that help you collect from the Issuing Bank. In particular, the
Issuing Bank, the Visa/MasterCard Network, the Sponsoring Bank,
and the Processor all share in dividing up the Discount Rate proceeds.
OK, now lets talk about protection.
First, it provides some protection for you, the Credit Card Merchant.
When you sell goods to a Cardholder, and you have received authorization
for the Transaction Amount from the Issuing Bank, then the Issuing
Bank is promising you that after you submit the Deposit transaction
it will deduct the Transaction Amount from the Cardholder's credit
limit, and in cooperation with your Processor, transfer the Net
Settlement Amount into your bank account at your Sponsoring Bank.
However, this promise from the Issuing Bank does not come without
some strings attached. When you submit the Deposit transaction,
you are, in effect, promising the Issuing Bank that you will deliver
to the Cardholder the goods and services that you promised to the
Cardholder.
In effect, the Issuing Bank's promise to pay you is only as good
as your promise to the Issuing Bank that you will deliver "expected"
goods and services to the Cardholder. The word "expected"
is important. If you have made representations to the Cardholder,
leading the cardholder to create "expectations" in his/her
mind, then by accepting a Credit Card for payment, you are in effect
promising the Issuing Bank that you have or will "make good"
on those expectations.
So it is a two way street. If you make good on your promises to
satisfy the Cardholder's expectations, the Issuing Bank will make
good on its promise to pay you the Net Settlement Amount.
In order to expedite your payment of the Net Settlement Amount,
the entire system operates on the basis of trust with you. When
you submit the Deposit, your Processor, your Sponsoring Bank, and
the Issuing Bank all TRUST that you have or will fulfill your commitment
to satisfy the Cardholder's expectations. The system does not ask
the Cardholder if he/she is satisfied before you get your payment,
the system TRUSTs that you have or will (in the immediate future)
satisfy the Cardholder, and based on this TRUST, your Processor
instructs the Issuing Bank to transfer the Net Settlement Amount
into your account at your Sponsoring Bank. In fact, that is one
reason why your Sponsoring Bank is called "Sponsoring".
The bank is sponsoring you as a trustworthy merchant - one that
consistently fulfills the Cardholder's expectations.
Now, here is the rub. What happens if the Issuing Bank gets informed
by the Cardholder that you did not fulfill the Cardholder's expectations?
Maybe the Cardholder thinks that you never delivered the goods
and services you promised him/her.
Maybe the Cardholder thinks that he/she never ordered the goods
or services that showed up on the Cardholder's credit card bill
from the Issuing Bank.
Maybe the Cardholder received the goods and services, but they
did not meet the Cardholder's expectations, so the Cardholder wants
to return the goods (if any) and wants his money back (e.g. a refund).
Well, the Issuing bank still is operating on the TRUST system.
They assume that either the cardholder is mistaken, or that you,
as a trustworthy merchant have or will "make good" on
your promises to the Cardholder. But the Issuing Bank is obligated
to investigate the Cardholder's complaint.
To resolve a Cardholder complaint regarding non receipt of goods
or services, the Issuing Bank first (typically) sends a Retrieval
Request to your Processor. Your Processor (e.g. FIRST-TRANS) will
then forward this Retrieval Request to you. The Retrieval Request
is basically asking you, the Credit Card Merchant, for proof that
you sold and delivered the disputed goods or services to the complaining
cardholder. This proof usually consists of a document, in your possession,
which has been signed by the Cardholder acknowledging the Cardholder's
receipt of the goods or services that were charged on the credit
card.
If you can prove in a timely fashion that you delivered the goods
or services to the Cardholder, then your Processor will forward
that information to the Issuing Bank, who in turn will inform the
Cardholder, and the complaint is usually dropped (but not always).
Important! If you do not have such a "proof" document,
or something equivalent, or if you cannot find and deliver a copy
of that document to your Processor in a timely fashion, then you
need to know that the system will assume that the Cardholder is
right and that you did NOT deliver goods and services as you promised
when you submitted the deposit transaction. When this happens, several
things occur. First, the Issuing Bank submits a chargeback to your
Processor. Simultaneously, the Visa/MasterCard network takes the
original Transaction Amount of the disputed transaction out of your
bank account at the Sponsoring Bank. (Often, this is a deduction
from the net settlement for your most recent deposit transactions).
Finally, the chargeback goes on your Merchant Account Record.
Are chargebacks bad? The answer is YES - you need to do everything
you can to avoid them. The system understands that if you do any
volume at all, some small number of chargebacks may be unavoidable,
and part of the cost of doing business. (You should assume this
too in your budgeting). However, if you get too many chargebacks,
then the system starts wondering about the TRUST it put in you.
This jeopardizes your standing as a Credit Card Merchant. If it
gets too bad, then your Merchant Account may be terminated by your
Sponsoring Bank, and you may find it impossible to find another
Sponsoring Bank. If it appears that you intentionally created many
chargeback situations, then you may be liable for charges of fraud,
and criminal prosecution.
OK, so part of your responsibility as a Credit Card Merchant is
to avoid chargeback situations. It is not all that hard. Here are
some guidelines to help you do that.
First, if you accept a credit card for payment, make sure that
you are accepting it from the legitimate Cardholder, and not someone
who just knows the card number, or has the card in his possession.
(Note, if a cardholder "knows" his card has been lost
or stolen, and reports that fact, then your Authorization transaction
will fail. However, if the cardholder is unaware that his card is
lost, or if just the card number was pirated and bogus charges have
not appeared on the Cardholder’s statement from the Issuing
Bank, then your Authorization transaction may succeed).
If you can physically touch the Cardholder's card (e.g. the card
presented to you by the Cardholder), then you should verify the
signature on the back of the card matches both the name on the front
of the card, and the signature on your sales slip. If you can, ask
for another form of identification to give you more confidence that
the person who has physical possession of the card is in fact the
Cardholder.
If you cannot physically touch the card, (e.g. as in phone sales,
mail order sales, and Internet sales), then it is more difficult
to verify that the person that is using the card number is in fact
the Cardholder, and this increases the risk that someone is fraudulently
using a stolen card number. In this case you have several methods
for verifying that the person providing the card number is the Cardholder.
- Get the Cardholder's name and telephone numbers (home and business
phone), and if you are willing, tell the presumed Cardholder that
you intend to call him back before delivery. Fraudulent shoppers
(people who use credit card numbers that do not belong to them)
will not want to give out too much information to you that can
be traced back to them.
- If you are using the Internet to capture orders, then require
your Internet order-taking software (or service company) to capture
and record as part of the transaction the shopper's phone number
and Email address (and verify that the Email address contains
a valid domain name). Also require your software or service bureau
to capture and record the shopper's IP address. If fraud can be
shown, then the IP address, along with the time and date can be
used to track down the fraudulent party. (This threat may prevent
some attempted fraud). Also require your Software or Internet
order-taking service company to post on the Internet a warning
to shoppers that attempted credit card fraud will be prosecuted
to the fullest extent of the law.
- For domestic orders, take advantage of the address verification
service offered by your Processor. Address verification requires
that you capture the Cardholder's billing address (the street
number and zip the Issuing bank uses to bill the Cardholder),
and then submit that address as part of the Authorization transaction
to your Processor. Your processor will attempt to verify the address
with the Issuing Bank. If address verification fails completely
(for Domestic addresses), you may wish to not accept the order,
or to confirm the order by telephone call to the Cardholder.
- Do not ship to an address that is not the same as the Cardholder's
billing address (as used in address verification). A crook, using
a stolen card number, will not usually want you to ship to the
real cardholder's address, even if he knows it.
- Know your Cardholder personally if at all possible. If you have
a repeat customer, and you know them personally, then you might
be able to relax some restrictions you might otherwise apply.
If you cannot verify to your satisfaction that the person presenting
the card number is, in fact, the Cardholder, then you need to decide
the risk you are willing to take. If you are delivering low cost
services, or products for which your unit and shipping costs are
low (e.g. software or manuscripts that are delivered over the Internet),
and you have taken reasonable precautions (e.g. as mentioned above),
then you probably can accept the transaction, but expect some chargebacks.
Remember, you are liable for the chargebacks, so if you expect some,
then you need to budget for their occurrence.
If you are delivering high cost services (e.g. that consume a lot
of your time), or products for which your unit or shipping costs
are high, then a chargeback could force you to take a loss for these
costs, and you will want to reduce your chargeback risks as much
as possible. In particular, you should avoid taking orders for high
cost goods to one-time customers in non-domestic (e.g. overseas)
locations.
The second way to reduce chargebacks is to get a signed receipt
from the Cardholder and if applicable a signed proof of delivery
from the shipper for delivered goods. (A signed receipt from someone
that is not the Cardholder, or alternatively does not represent
the Cardholder, will not do you any good). This signed receipt from
the Cardholder is your proof of sales and delivery that you will
need to satisfy any retrieval requests. Ideally, the receipt should
be signed by the cardholder, and the receipt should be stored in
your files so that you can promptly respond to a retrieval request.
If you are accepting transactions and delivering goods or services
over the Internet, then be sure your software or your service provider
provides you with a hard-copy receipt of the order and delivery
fulfillment, including as much information about the Cardholder
as possible. If you are delivering by ground carrier, then use a
carrier that requires a signature on delivery, and allows you get
a printout of that signature.
The third way to reduce chargebacks is to advise shoppers of your
warranty and return policy, and then consistently live up to that
policy. Remember, your warranty and return policy set expectations
in the minds of your customers, and as a trusted Credit Card Merchant,
you are obligated to meet those expectations. If you are advertising
and accepting orders on the Internet, then California (and possibly
other states) requires you to include your phone number, address,
and return policy on the Internet order form so that Cardholders
know how to reach you in case they wish to exercise their warranty
or return rights. Remember, if the Cardholder's expectations are
not met, and you do not issue a refund for returned merchandise
or otherwise honor your warranty according to expectations, then
you may get a chargeback that you will have to pay.
Also, be sure your Internet software, or your Internet Service
Bureau permits you to submit credit transactions to your Processor.
You will need to submit a credit transaction if a Cardholder requests,
and you grant, a refund (full or partial) as per your refund/return
policy.
There are four reasons why you should honor requests for refunds
promptly.
- If you process with FIRST-TRANS, then when you issue a credit
transaction, FIRST-TRANS returns to you the discount rate charges
that you paid for the equivalent deposit transaction. For example,
if you sell a product to a Cardholder for $100, and your discount
rate is 2%, then your Net Settlement Amount is $98. If you subsequently
issue a refund to the cardholder for $100, and your discount rate
is still 2%, then FIRST-TRANS will net the $100 credit from a
$100 deposit that day before computing your Net Settlement. In
effect, FIRST-TRANS puts back into your bank account the original
$2 of discount rate charges before debiting your bank account
for the $100 refund. With FIRST-TRANS, the combination of the
original deposit transaction, followed by the subsequent credit
transaction, does not cost you any discount rate charges. This
$2 comes out of FIRST-TRANS's pocket, since the Issuing Bank,
Visa/Master Card Network, and Sponsoring Bank do not give back
their share of the original Discount rate charges. This is one
of the benefits of Processing with FIRST-TRANS, and is FIRST-TRANS's
way of encouraging you to promptly issue credit transactions according
to your refund/return policy as a mechanism for avoiding chargebacks.
- If you get a chargeback because you did not refund promptly
(or for any other reason), then FIRST-TRANS does not return the
original discount charges.
- If you get a chargeback of any kind, your reputation as a trustworthy
credit card merchant drops just a little bit. If you get a lot
of chargebacks, your reputation drops a lot!. To keep your reputation
up, promptly issue refunds according to your policy.
- Your Sponsoring Bank is counting on you to issue refunds promptly.
In fact, your Sponsoring Bank and/or your Processor may request
that you report to them periodically on how you are performing
in this regard. If you are keeping up your obligations, you will
continue to be viewed as a trustworthy Credit Card Merchant. If
you fall behind, then your Sponsoring Bank may ask for a percentage
of your deposits to be put in reserve to help cover potential
chargebacks. If you fall behind in giving refunds, and do not
promptly inform your Bank or Processor that you are behind, then
you run the risk of your Merchant Account being Terminated. You
do not want your Merchant Account to be Terminated. When that
happens, your Sponsoring Bank is obligated by the Visa/MasterCard
rules to put your name in a master database that is accessible
by all Sponsoring Banks in the world. If one Sponsoring Bank terminates
you, then your chances of getting another Sponsoring Bank to sponsor
you are very low indeed. This could make it very difficult for
you to ever get approved to accept credit cards again. Remember,
do not fall behind in issuing refunds.
The fourth way to reduce chargebacks is to not submit a deposit
transaction until you already have, or are ready to deliver the
associated goods or services. If you submit the deposit transaction
days or weeks before you deliver the goods, you do two things.
- You are accepting money from the Issuing bank that is really
not yours. Remember, because of the way chargebacks work, the
Net Settlement Amount you receive from a deposit does not really
"belong" to you until you have satisfied the cardholder's
expectations. You have not even begun to satisfy the cardholder's
expectations until you deliver your goods or services, and even
then, they must have the quality and features you have advertised.
- You substantially increase your risk of a chargeback. Issuing
Banks are very good at including a recent credit card charge on
a Cardholder's credit card statement. If you submit a deposit
transaction on Day 1, and this charge is near the end of a billing
cycle for the Cardholder, then the Cardholder may see your charge
on his statement on Day 5, for example. If you have not delivered
your goods or services prior to Day 5 (in this example), then
you run the risk of annoying the Cardholder (your customer), and
in getting a Retrieval Request. If you cannot honor the Retrieval
Request, and do not immediately submit a credit transaction, then
you will get a chargeback. Retrieval Requests themselves cost
you money since you have to take time out to respond to them.
It is best to avoid them, and one good way is to deliver goods
and services very near the time you submit the deposit transaction.
The fifth way to reduce chargebacks is to protect your merchant
id and terminal id (i.e., FIRST-TRANS-ID). Your terminal-id identifies
you to your Processor. You do NOT want anybody submitting transactions
to your Processor using your terminal-id without your permission.
Keep your transaction-processing equipment physically secured in
your place of business. Be sure that only authorized individuals
have access to that equipment at all times. If you use Internet
order-taking software, or contract with an Internet service organization
to accept credit card orders over the Internet on your behalf, then
be sure your software and/or Internet service organization keep
your terminal-id absolutely confidential. Also, qualify your Internet
service organization as being completely honest and reputable. In
particular, do not permit your terminal-id to be exposed to Internet
shoppers, even in hidden HTML fields. In general, YOU are responsible
for all transactions submitted to your Processor with your terminal-id,
so manage its use as carefully as you manage your bank accounts.
The credit card system offers measures of protection to both the
Credit Card Merchant and to the Cardholder. To the Credit Card Merchant,
the protection is offered by the Issuing Bank who represents that
if the Credit Card Merchant fulfills his bargain, then the Merchant
will receive (and get to keep) the Net Settlement Amount. To the
Cardholder, the protection is that if the Merchant does not fulfill
his bargain, then the Cardholder will not be out the price of the
merchandise. This is easy for the Issuing Bank to enforce, since
the Issuing Bank will just charge back your account for the Transaction
Amount.
The Issuing Bank is the friend of the Cardholder. The Issuing Bank
provides a credit line to the cardholder, and protects the cardholder
from merchants that do not fulfill their part of the bargain.
Your Processor and Sponsoring Bank are your friends. They sponsor
you as a Credit Card Merchant that will fulfill your part of the
credit card transaction bargain, they provide the system that gets
the funds from the Issuing Bank, and puts them in your bank account
after you submit a deposit transaction, they work with you to make
sure you respond to retrieval requests in a timely fashion, and
if you do get a chargeback, they will work with you to try to reverse
it if you have presented the necessary documentation, and have the
proof of shipment and delivery and meeting the Cardholder's expectations.
In return for this support, your Processor and Sponsoring Bank
expects you to rigorously and honestly convey accurate information
to your potential customers (thereby setting expectations), and
then to diligently fulfill those expectations. From the Processor's
point of view, this translates into four main questions:
- Are you fulfilling your shipment dates and quality commitments
according to the expectations you have set in the mind of your
credit card customers?
- Are you promptly responding to Cardholder requested returns
and refunds according to your policy, and submitting the appropriate
credit transactions to your Processor?
- Are you doing everything you can to verify that the credit card
numbers you are accepting for your goods and services are from
the actual Cardholders, and not from someone else that happens
to know the card number?
- Are you meeting the terms of your agreement with your Processor
regarding charging the card and timing of delivery?
From time to time, your Processor or Sponsoring Bank may ask you
to provide an honest assessment of your performance against these
questions. Your answers to these questions sets expectations by
your Processor and Sponsoring bank regarding the number of retrieval
requests and chargebacks you may be getting in the future. Your
answers may result in your Processor or Sponsoring Bank requesting
some reserves against your account, but your answers serve to maintain
your good relationship with your Processor. If your answers to these
questions are inconsistent with your Processor's processing, retrieval
and chargeback experience with you, then you are running the risk
of damaging your relationship with the organizations that are supporting
you as a Credit Card Merchant.
The credit card system is optimized towards card present, magnetically
captured (e.g. scanned by a card reader), near-immediate delivery,
deposit transactions with, or very soon after authorization, and
the same Transaction Amounts submitted with both authorization and
deposit transactions. Deviations from this "optimized"
view of the world usually result in higher settlement rates as dictated
by the Visa/MasterCard system. This could mean higher discount rates
for you, or additional settlement and transaction fees that are
billed to your account at the end of the month. If your business
deviates from this “optimized” view, it’s important
to consider these factors and build these costs into the business.
The easier you can make it for your customer to pay you, the more
sales you will get. Credit Cards are a convenient way for your customers
to finance their purchases from you. Your Processor and Sponsoring
Bank are here to help you succeed in your business, and that is
why they are giving you the opportunity to be a Credit Card Merchant.
Their trust in your integrity and honesty form the basis of their
relationship with you and why they are on your side in the event
of retrievals and chargebacks.
FIRST-TRANS is proud to be the
lowest cost Processor in the nation, and one of the most flexible
when it comes to the acceptance of many different kinds of merchants,
transaction mechanisms (e.g. the Internet), transaction volumes,
and both card-present and no card-present transaction activity.
FIRST-TRANS hopes that you will consider our processing company
if you want to be a first time credit card merchant, or if you want
to switch Processors to take advantage of our low rates and internet
services, or if you just want a second merchant account for your
protection.
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