Periodically, we receive calls from larger retail establishments, such as restaurants, that inquire about Point of Sale (POS) Systems.  Questions relating to POS Systems are beyond my knowledge of expertise but that may soon change as our scope of services expand in 2007.  Indeed, many merchant account providers are branching out from their core competency, seeing the increased demand for business operating technology, and hoping to capitalize on such demand.

POS systems have been labeled as glorified, modern cash registers, but I think that such a description is too narrow.  While the hardware itself consists of a cash drawer, receipt printer, touch-screen monitor and computer, the functions assumed by POS systems are myriad, much more involved than any cash register.  Consider a restaurant’s POS system that can handle the following tasks (not an exhaustive list): Monitor time and attendance of employees with scheduling, track reservations, submit orders to kitchen staff immediately, keep tabs on inventory, perform payroll functions, facilitate credit card transactions (that’s where we come in), etc.  It is mind-boggling to grasp how this synergistic combination of software and hardware can handle almost all business-related responsibilities, improving speed of service, order accuracy and sales while lowering operating costs.

POS systems can range in price from several hundred dollars to over $100,000 – depending on the complexity of tasks that must be accomplished.  Typically, retail businesses that generate a high monthly volume of transactions will be most interested in this technology, yet small businesses, such as entertainment enterprises (e.g., bars and nightclubs) realize the systems’ benefits, too, and may looks towards more affordable models.

Of course, merchants will need to be trained on any installed POS system and must rely on customer support.  In all likelihood, merchant account providers will not offer this direct technical assistance, but will outsource customer service tasks to companies that specialize in the POS systems field, or in other cases, to the manufacturer’s tech support department.  As merchant account providers enter the POS systems field, at the very least on a referral basis, prices for this technology should continue to decrease.  The greater the sales force – the more vendors for a given product – the better the possibility that price wars will result, only benefiting merchants who purchase the technology.

Merchant account providers will align themselves with POS systems companies that work in concert with their credit card processing platforms.  If a merchant account provider only uses the Vital network, for example, it is imperative to team up with a POS systems firm that enables users to process on the Vital network.  POS systems that do not require users to process on closed networks, such as Positive Feedback Software (FreePOS), allow merchants to use any merchant account provider.  Consequently, processor-independent POS systems companies may find themselves a plethora of merchant account processing suitors, hoping to establish mutually beneficial alliances.

In life, it may be difficult to craft win-win solutions where all parties affected benefit from a given solution.  When a problem-solving idea truly serves the best interests of all, such a resolution needs to be embraced.  In the world of ecommerce business and possible concomitant chargebacks and fraud, “payer authentication” is that elusive win-win initiative that offers great value to both merchants and their customers.  (Merchant account processors also “win” by providing a program that increases their merchants’ profits and simultaneously lowers their risk of doing business.  Merchants reciprocate with loyalty and trust, forging a closer business relationship with their processor.)

Payer authentification, marketed under the names, Verified by Visa and MasterCard SecureCode, is another potent tool in merchant account fraud prevention.  In these programs, customers select a password that is associated with their Visa or MasterCard credit card.  They can assign their passwords at their issuing bank’s website or, if permitted by their card issuer, at a participating merchant’s site while shopping.  This password ultimately serves to protect the customer’s identity, ensuring that the rightful cardholder is the one who is actually making the payment.

When making online purchases at sites whose owners have enrolled in the Verified by Visa and/or MasterCard SecureCode program, cardholders activate this payment authentication tool during the checkout process.  Customers select their desired items from the shopping cart and then input their cardholder number, submitting the order.   Before an order confirmation is provided (assuming the credit card itself will be accepted), a window will appear where customers type in their password.  Once there is a password match (i.e., the password provided by the customer matches the one on file, associated with the card), the purchase is complete and a confirmation is issued.

This technology is gaining more prominence as thousands of card issuing banks are rolling out these liability-reduction programs for their cardholders.  There is a proliferation of enrolled merchants, too, especially the ones who own businesses that sell high ticket items, have rather large monthly credit card processing volumes, sell overseas, and/or are engaged in businesses that have a history of high chargebacks (e.g., selling jewelry online, Internet-based pharmaceutical businesses, etc.). 

An ever-increasing number of small business owners are jumping on the payer authentication service bandwagon, too, realizing that even one lost chargeback may cost more than implementing the Verified by Visa and/or MasterCard SecureCode programs.  In addition, such owners realize that they can now more readily increase their cash flow by accepting transactions that they may have been formerly reluctant to accept.  Indeed, with a better “insurance policy,” authenticating the cardholder/ostensible customer, merchants can receive added liability protection from fraudulent chargeback activity, thereby increasing sales options.  For example, selling outside the States remains a risky proposition for any business owner.  However, by reducing the chances of incurring chargebacks, certain merchants may now more readily embrace a global market.

One company that is on the forefront of payment authentication programs is Ohio-based, CardinalCommerce Corporation (http://www.cardinalcommerce.com).  It is not a surprise that they are the leading provider of Verified by Visa and MasterCard SecureCode as they offer an ASP solution that seamlessly integrates with any checkout process.  CardinalCommerce estimates that the single integration should only take several hours and their technical support team is available if any questions arise.  (The company also offers an Internet site, always monitored, to enhance customer support.)  This fast, relatively easy integration works in concert with any credit card processing provider, enabling merchants to accept credit cards through any vendor.

Brad Poole, an account manager at CardinalCommerce, asserts that merchants will incur approximately 70% less chargebacks with the implementation of Verified by Visa and MasterCard SecureCode.  While recognizing it is not a foolproof guarantee that all chargebacks can be avoided, he states, “These programs will dramatically reduce the ‘I never authorized payment’ chargeback which is the most common fraud-related type of chargeback.”  Mr. Poole cites the resultant advantages: greater confidence among merchants and customers in transaction integrity, a reduction in merchant administrative costs (e.g., avoiding chargeback fees), a sizeable lessening in merchant financial losses due to chargeback-related lost sales and even loss of product/service, and an increase in potential sales. 

When sales are conducted in the United States, Visa guarantees full payment to merchants even on attempted authentications (i.e., merchant has the authentication technology in place but the cardholder and/or card issuer are not enrolled in the programs).  However, merchants who sell to an overseas customer can be fully protected only on full authentications (i.e., customer validates his/her cardholder identity with a valid password.)  MasterCard has the opposite policy, providing chargeback protection on attempted authentifications for international sales and liability protection on full authentifications for US-based sales.  Under these scenarios, a customer chargeback is blocked and the merchant is not required to reimburse the customer.  Who is responsible to reimburse the customer then?  Answer: The card issuing bank!  The liability has now shifted and the finacial burden and stress resulting from a chargeback is now off the merchant’s shoulders.  (Banks can change the chargeback code – the reason for the chargeback – but this is tantamount to committing fraud.)  On another happy note – at least for the merchant – he/she may now enjoy lower interchange rates because of payer authentication enrollment.

Of course, merchants must still engage in a cost-benefit analysis.  The fee structure for Verified by Visa and/or MasterCard SecureCode may be obtained directly from CardinalCommerce (http://www.cardinalcommerce.com).  Account Manager, Brad Poole, serves as an important bearer of information and can be reached at the following telephone number: 877.352.8444 ext 169.

While the advantages of payer authentication are evident to merchants, will cardholders recognize enrollment advantages?  After all, Visa and MasterCard ensure that a given cardholder only has, at most, a $50 liability if unauthorized purchases have been made.  CardinalCommerce officials aver this is irrelevant to the merchant, citing chargeback protection even on attempted authentications and pointing out that customer program adoption rates are increasing each day.  Furthermore, down the circuituitous ecommerce road, Verified by Visa and MasterCard SecureCode may one day be mandated, compelling merchants, if not cardholders, to utilize these services.

The handwriting for payer authentication programs may just be on the wall.  It behooves a merchant to take notice.

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Jason Murphy, an electronic and mobile commerce fraud expert and consultant who works at CardinalCommerce, writes an informative, blog featured at allpaynews.com.  You can access it by clicking:

http://www.allpaynews.com/cardinalcommerce

This blog will help the reader keep abreast of the latest fraud preventative tools offered by CardinalCommerce as well as acquire information on other reputable vendors who offer merchant-friendly services -- programs that facilitate safer, secure and/or more efficient transactions.  Indeed, merchants need to acquaint themselves with technology and services that help to increase sales and simultaneously reduce risk.

In this vein, we urge business owners to learn more about Verified by Visa and MasterCard SecureCode.  Here is a demo of  the payer authentication services so that you can see its application on an ecommerce website:

http://webstore.cardinalcommerce.com/demo/run/demoStartPage.asp.  

You should find the demo instructive, revealing the services' inherent advantages. 
    

I recently tuned into a sports radio station where the host lamented over the rule that baseball teams from large markets (e.g., New York-based teams) have to subsidize teams from smaller markets (e.g., the Kansas City team).  “When there are six times more people living in New York than in Kansas City,” the host averred, “Why should the end product have to be the same?”  He added, “Why should there even have to be a level playing field?”  The host’s sidekick disagreed, mentioning the importance of “fair competition” in sports and the fact that denizens of less populated areas should not have to be “penalized” simply because of where they live.

I found the discussion interesting because it has so many relevant applications in the business world and in our scale of economics.  For example, individuals with more disposable income pay a higher percentage of that income in tax than wage earners who do not make as much money.  Simultaneously, large, wealthy businesses are able to secure the best available discounts from an array of willing vendors.  There exists power in numbers and those firms that buy the most from a given vendor are rewarded with lower fees.  I can assure that Walmart’s credit card processing rates are less than Joe Q. Merchant’s credit card rates.

Indeed, the term, “volume discount,” is used and applied frequently – found in every segment of our economy.  Few among us would argue that the notion of paying less when purchasing more is unjust, especially in a free market economy.  But flipping the volume discount principle on its head, is it unfair to penalize businesses that do not produce much volume?  This is what typically happens in the merchant account field as a monthly minimum charge is often imposed.

A monthly minimum is the minimum amount that a merchant must pay in actual processing fees for transactions.  It is calculated using the following formula:

Transaction Amount (amount of sale) times Discount Rate plus Transaction Fee = Processing Amount.  This figure is applied towards the monthly minimum.  For clarification purposes, let’s use real numbers to demonstrate how a monthly minimum works.

Use the following numbers:                    Transaction Amount (amount of sale) = $100

                                                            Discount Rate = 2.3%

                                                            Transaction Fee = $.25

                                                            Monthly Minimum = $25

Plugging in the numbers, the formula reads:

($100 x .023) + $.25 = Processing Amount. 

Doing the math, the Processing Amount =  $2.55 *

It is important to note that most merchant account providers only count transactions at a “qualified rate” towards this processing amount.  If a merchant takes a foreign credit card, for example, the transaction is considered non-qualified and does not count towards this processing amount.   

Now if this is the only transaction that transpires for this low volume processing merchant, the business owner would then owe an additional $25 (Monthly Minimum) - $2.55 (Processing Amount) or an extra $22.45 for the month.

A reduction in monthly minimum will obviously lower the processing costs for a merchant.  For instance, using the example above, if the monthly minimum is lowered from $25 to $5, the owner would only owe $2.45 extra for the month.

If a merchant has no transactions for a month, then he/she will have to pay the entire specified monthly minimum.  Therefore, as part of the process in deciding which merchant account provider to select, a merchant should consider the indicated monthly minimum.  For those merchants who typically have $2,000 or more in credit card processing sales, the monthly minimum should not come into play.  (Most merchant account providers assess monthly minimums that range from $0 to $35.) 

At the risk of standing on a soapbox, our company feels that the imposition of a monthly minimum fee penalizes and hurts small business owners, many who are just launching their businesses and may, one day, produce a high volume processing amount.  Consequently, we waive the monthly minimum fee under certain programs and institute a monthly minimum that is never higher than $5 for other programs.  (The only exception is when we provide a client with a wireless Nurit 8000 at no initial expense – a machine that is priced from $600 to $1,000.  In this scenario, as we offer the terminal as a “lost leader,” our monthly minimum is $25.)

As our monthly minimum normally goes from $0 to $5, we have received more attention from small business owners as their processing fees can be contained.  Merchant account providers that assess a hefty monthly minimum charge argue that the monthly minimum is not an extra fee – but one assessed to ensure that a minimum amount of processing takes place.  But that is only true if the merchant reaches the monthly minimum threshold, something that a small volume merchant may fail to do month after month. 

High monthly minimum merchant account providers counter that there is much worked performed in establishing a merchant account.  Time and labor also need to be factored in after a merchant is set up which incurs real cost to the provider.  A monthly minimum fee helps to defray these costs.  However, at the same time, it places a financial burden on new/small business owners. 

It is our fervent hope that all business owners need not worry about a credit card processing monthly minimum amount as this would indicate that they are conducting ample sales.  But until the time when processing volume is no longer modest, merchant account providers can lend an outstretched hand of support to those who are building their business.  This will only help build such owners’ loyalty and trust, perhaps cementing a permanent partnership.

Several years ago, I read an article that reported that over one-third of the entire United States workforce works from home, at least on a part-time basis.  (No wonder why I see so many of my neighbors during the day.)  This work from home trend seems to be proliferating, as more and more people work as telecommuters or as new home-based business owners.  The American dream of entrepreneurship is alive and well, and although it is difficult, even against the odds, to realize financial success through the avenue of self-employment, it appears that so many are willing to take such a risk, arming themselves with the requisite knowledge to achieve business objectives.

One part of the equation for a home business owner to solve is to understand the process of accepting credit cards and its relevant costs, assuming the merchant has decided to enable customers to use a credit card payment option.  Various credit card processing programs are available and reflect the manner in how a merchant will market and sell his/her products or services.  For example, a home-based business owner who intends on having face to face contact with customers, may look into swiped or retail credit card processing, incumbent on using a physical credit card terminal.  But many home-based merchants who engage in point-of-sale are not truly processing from home but are mobile, thus needing wireless credit card terminal access.  Those who sell goods at trade shows or fairs may be particularly interested in a wireless credit card processing program.

But no absolute statements can be declared as to the most cost-effective credit card processing solution for the home-based business owner as each option must be evaluated on a case to case basis.  For instance, I have a friend who intermittently sells works of art at shows.  Her monthly credit card processing volume simply does not warrant incurring the additional fees of a wireless credit card processing program.  She has opted to use a “dial pay” process (discussed in an earlier blog entry), and is assessed a higher credit card processing rate per transaction but charged a lower monthly fee.

We have other home-based clients who decide that the virtual terminal best suits their needs.  Here, the virtual terminal replaces a physical credit card terminal as the mechanism to facilitate the transfer of funds from customer to merchant.  The virtual terminal is a simple, Internet-based interface, enabling the merchant to input the customers’ credit card payment information.  While the merchant incurs the “keyed in” credit card processing rate (not the lower swiped rate), upfront costs are contained.  Many merchant account providers charge a nominal fee or even waive the fee to obtain virtual terminal processing access.

The following three merchant account programs are the most common options for home-based business owners who do not sell online: a) Swiped merchant account option, necessitating the availability of a physical credit card terminal; b) MOTO (mail order, telephone order) merchant account option where a virtual terminal must be used; and c) Dial Pay merchant account program where a merchant must use a regular touch-tone or mobile phone.

Home-based business owners who intend to sell their products and/or services over the Internet must thoroughly explore a merchant account provider’s Internet credit card processing program.  This type of merchant account program generally involves three components, briefly described as follows: a) E-commerce shopping cart – Software that, in essence, serves as a merchant’s online catalog and ordering process.  Customers can select items and place them in a shopping cart, adding and removing items with ease, eventually “checking out” and ordering; b) Payment gateway – Once the customer is ready to check out, he/she may be directed to a payment gateway, where the customer can safely and securely type in his/her credit card payment information.  The gateway helps to authorize and settle payment transactions, encrypting sensitive information; and  c) Merchant account processor – Acquiring bank.  A merchant account processor uses an acquiring bank that deposits the total amount of approved funds into the merchant’s designated bank. 

It is imperative that merchants ensure that that their shopping cart and/or gateway have a “secure certificate” that can encrypt important data, such as a customer’s credit card number.  Merchants can purchase their own secure certificate and pass the information to the payment gateway on the backend if they don’t want their customers to ever leave their site.  In addition, merchants must make certain that the payment gateway is compatible with the shopping cart, working together synergistically.  Look for a payment gateway that is compatible with the vast majority of shopping carts, such as Authorize.net.

Home-based business owners can find merchant account providers that can offer all the aforementioned pieces of the e-commerce puzzle (e.g., shopping cart and payment gateway with concomitant secure certificate, and merchant account processing.  This type of full service merchant account need not be expensive, including start up costs.  Free shopping carts, such as ZenCart or OS Commerce are available, too, and may be worth examining.  However, technical support for these carts is not available although experienced online business owners may be able to answer shopping cart-related questions in e-commerce forums.  

Generally, the first place new home-based business owners look to acquire a merchant account is with their local bank.  However, many banks are averse to accepting home-based businesses, particularly ones conducted over the Internet.  Moreover, even if their banks will provide credit card processing capability, the fee structure may not be any better than rates offered by any independent sales organization (ISO).  It pays to shop around for the best rate.  (If you are reading this entry on my blog, you’ve already found the best rate.)  Please realize than merchant account providers, such as IntelliCollect, work with banks as well, ensuring dependability and security.  (Our acquiring bank is First National Bank of Omaha.)

Many home business owners are intimidated with the process of obtaining a merchant account.  Please understand that the course to gain credit card processing capability is not difficult, only necessitating the thorough review of a merchant account processor’s application.  All rates need to be indicated, reflective of what an agent has stated and/or written to a merchant.  As added reassurance, many home business owners can find merchant account processors who will waive any termination or cancellation fee.  In other words, the merchant will not incur any financial penalty if he/she decides to cancel the credit card processing program.

When the merchant has signed the application, he/she submits it to the underwriting department for review.  Typically, the merchant also forwards the underwriters other documentation (e.g., Doing Business As license or Articles of Incorporation, a copy of a voided check, copy of a driver’s license, etc.)  The underwriters base their decision on several factors, most notably the owner’s personal credit card rating score and the type of business conducted.  One need not have a stellar score to obtain credit card processing capability; the score must be decent/good.  Many merchant account providers accept home-based businesses but underwriters weigh the risk of chargebacks (when customers dispute and charge back transactions) as a criterion in their decision-making process.  (For example, we had a prospective home-based client who provides consultation to customers who declare bankruptcy.  The underwriters were unable to approve such a client because of the higher risk of chargebacks.  Indeed, those who declare bankruptcy may be more apt to initiate chargebacks and dispute the merchant’s charges.)

Still, the overwhelming majority of applications from home-based business owners are approved.  Once set up, the home-based merchant can start to accept customers’ credit cards – on the path towards financial well-being.  Any reputable merchant account provider will be accessible to the merchant every step of the way.