3 things no one tells you about online credit card processing

Here comes the pain

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Image credit: flickr/Damian Gadal

Now that you know how to get started with online credit card processing, here are 3 things you should know before you dive in that nobody tells you about.

The fees, my god the fees!

I know what you’re thinking, only an imbecile wouldn’t know there are fees associated with credit card processing, but hold on a minute. Most people don’t consider the full picture of what these fees entail and how they can impact some business more than others.

[When will mobile commerce be ready for primetime? and Hurdles seen to widespread use of mobile payments]

For starters, prepare to pay 2 sets of fees. One to the credit card processor, and another to the gateway. The credit card processor fees will include the fees from the credit card companies along with per-transaction fees and service fees. The gateway will have another per-transaction fee and a service fee.

Credit Card Processor Fee Examples

Visa/Mastercard 2.3%
AMEX/Discover 3.5%
Transaction Fee $0.30 per transaction
Service Fee $10 per month
Processing Minimum* $25 per month

*If your Visa/Mastercard fee isn’t more than $25, you’ll be charged $25 for that month.

Credit Card Gateway Fee Examples

Transaction Fee $0.10 per transaction
Service Fee $10 per month

There are typically setup fees involved as well which can run you about $100 to get rolling.

So you’re looking at $20/month + $0.40 per transaction + ~2.9% per transaction.

Consider a business who sells lower dollar items in higher volumes at relatively low margins:

Example Business

Average Item Cost $5
Sales per month 10,000
Profit Margin 20%

That’s $50,000 in revenue, $10,000 in profit.

Now let’s take out the fees:

10,000 transactions * $0.40 = $4,000
2.9% of $50,000 = $1,450
$10 Service Fee * 2 = $20
Total Fees: $5,470

Making the Net Profit $4,530 or just 9% profit before taking into account the rest of the overhead. In this example the business ended up paying 10.9% in credit card fees.

This should illustrate why many lower dollar businesses (deli, convenience store, bar) have credit card minimums, as frustrating as they may be.

Chargebacks (boom you’re dead)

As a consumer you most certainly take for granted how much credit card companies have your back. You might get mad at them on occasion but they are always watching out for your money and your satisfaction, because a happy you spends more on their cards making them more money.

When fraud occurs, you’re covered. When you’re unhappy about a purchase, they will help you out. When you simply make a mistake, they’re there for you. Who they’re not there for is the merchant.

When a chargeback occurs, the credit card processor will immediately seize the funds in dispute from the merchant. They will send the merchant a dispute form which allows you to state your case and provide supporting evidence for it. Weeks or months later you will either be returned the funds or they will be gone for good. Since it’s your word against the customers, usually it will result in the latter.

These chargebacks can happen for legitimate reasons, like a stolen card, but it’s likely that you will have already fulfilled the fraudulent order by the time you’re made aware and you will now be out the full cost of the product and the shipping with $0 to show for it.

It can also happen for illegitimate reasons, such as a disagreement with a customer who knows they can hurt your business by disputing the charge on an item they’ve received. 9 times out of 10 the credit card company will stick with the customer.

No matter how it happens, and it will happen, you’re likely to lose a significant amount of money for something that is entirely out of your hands.

PCI Compliance

Payment Card Industry Compliance has gone from a mostly disregarded guideline to a serious regulation over the past couple years. Basically all of the credit card companies got together to make a set of rules that all merchants must comply to in order to remain a valid merchant. Starting in 2011 they became very serious about auditing and enforcing this compliance, and starting in 2012 online merchants must even have their site threat-tested by a verified third party each year in order to maintain compliance.

PCI compliance is very complicated and thorough so I won’t dive into the whole thing but be prepared to fill out a form containing over 120 questions (depending on your business) related to how your e-commerce system operates, how the data is stored, your security measures for your servers, employee access restrictions and much more.

This has to be done every year. It’s time consuming, it’s tedious, and it’s difficult, but not being in compliance can be extremely costly. Penalties for noncompliance can reach up to $100,000 per month!

Conclusion

Hopefully this makes you more informed about what’s involved with accepting credit cards online. It should also give you some sympathy for business owners who enforce credit card minimums or don’t accept them at all. The truth is that the card companies have merchants over a barrel. It’s the most common way for customers to pay and a necessity in the online world. You’ll need to deal with all 3 of these issues but now you’ll know that going in and can plan your business strategy with knowledge of the fee structure in hand.

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