Facts About Accepting Credit Cards Online

Before you can accept credit cards (either online or offline), you must have a Merchant Account, which is a special arrangement with a banking institution. Small and home businesses often experience difficulties qualifying for a merchant account, and Web based businesses run into even more problems.
The situation is this: Online transactions don’t take place at the point of sale (POS). They are considered to be "non-face-to-face" transactions. Since there is no way of ascertaining the customer’s identification, there is no way to be sure that the customer is the legitimate card holder. Therefore, financial institutions are leery about the high potential for fraud.
Moreover, the major credit card companies offer their card holders the right to contest charges on their statements that may be the result of theft, fraud or error. A contested charge is referred to as a chargeback. When a chargeback occurs, merchant will end up paying the charge to the issuing bank, in addition to a chargeback fee that can be as high as $30 or more. For example, if you sell a book for $20 through a credit card transaction, and the cardholder later contests the sale, you will end up paying your bank the $20 PLUS a chargeback fee of $10 to $30 dollars.
Consequently, many banks require a reserve fee when issuing merchant status. Typically, face to face sales have a chargeback rate of 1% of all sales. The potential for chargebacks is greater when it is an online sale, so the risk to both bank and merchant increases.
To minimize their risks, most banks have stringent requirements that a business must meet to establish eligibility for merchant status. Factors considered include cash reserves, length of time in business, tax returns, credit history, debt load, refund policies, volume of business, cost of item being sold, and other sources of income.
High Risk Processors are merchant acquirers that specialize in high risk business. They offset their risks by charging you higher transaction fees and higher rates. In the US, the Electronic Card Systems Inc. and Card Service International are two of the better known examples. Merchants living outside the US will be required to find a service that works with their own banking institutions.
Other Associated Expenses
The chargeback expense is the first and foremost concern for a merchant hoping to acquire a merchant account. Chargebacks can result in serious financial loss to the would-be merchant. Also, merchants who encounter too many chargebacks are at risk of losing their merchant account.
However, there are other charges and expenses to factor into the budget as well. Merchants will need to investigate hidden equipment costs, setup fees, line charges, bank transactions fees, holdbacks, and discount rates, etc. These vary considerably among service providers, so compare, compare, compare!