textfiles/anarchy/CARDING/merchant.cc

             CREDIT CARDS AND MERCHANT NUMBERS

The question "Why can't I get a Merchant Number for my
business" is one that keeps cropping up on a regular bases
and is most frequently ask by those who either operate a
Home Based Business, a new Start-up, or a small Mail-Order
operation.

As one who is involved with Credit Cards from the banking
side (I am employed as an Account Executive by a processor)
I will try to give you some insight as to what the problem
from the Banking side is and how it effects you . ( one
thing though, I am not involved in typing and spelling;  so
just read it .... don't grade it)

                   WHAT IS A CREDIT CARD?

Credit Cards (MasterCard, Visa, Discover, and Optima) as
opposed to Charge Cards, like American Express are actually
lines of credit offered to credit worthy customers of the
issuing Bank.  The Bank Customer is then issued an account
number to which all draws (Purchases) can be debited up to
the limit of the line. ( AKA `Maxed Out')

The Bank has also agreed to purchase, subject to scheduled
discounts, all approved vouchers submitted to it on the
behalf of the Merchant and initiated by the authorized Card-
holder which are then charged against the Card-Holders
account.

The Issuing Bank then offers the Card-holder the opportunity
to settle his account in full at the end of each month. If
the Card-holder cannot, or simply does not want to, settle
his/her account in full the Bank will treat this account as
a loan and set up a liquidation schedule at a preagreed
interest rate.

                   WHAT IS A CHARGE CARD

A Charge Card is one that works a lot like a Credit Card
except it is designed to be liquidated in full every month
and carries no pay-out provision.  The transaction process
is the same.

                       HOW THEY WORK

When a customer presents a credit card to a Merchant
authorized to accept it, the transaction is processed in the
following manner. . .
       It makes no difference if the Merchant is
       physically depositing the paper vouchers in
       his Bank or if the voucher data is
       transmitted electronically to the Merchant's
       Settlement Bank. ( this is what ever Bank
       actually pays the Merchant thus settling
       the account.) the process is the same.

The customer presents his card to the Merchant.  The
Merchant then calls the card company and ask for approval to
charge the merchandise or service to the customer's card.
If the permission is granted the Merchant then creates a
voucher containing all the necessary data including the
amount of the purchase and deposits it into his settlement
Bank.  The data is then transmitted to the acquiring Bank,
(that is the Bank who will buy the voucher from the Merchant
and is usually the one that issued the card).  The
settlement Bank then transfers the appropriate funds, (note
we are talking money now where as we were talking data), to
the Merchants bank account and charges the Card-holders
account for the gross amount of the voucher.

                 SO WHY THE PROBLEM?.......

Before 1987 Credit Card transactions were almost exclusively
conducted in a store, as most still are, with the Merchant
looking directly at the customer.  This gave the Merchant a
chance to prove, if necessary, that the person presenting
the card was in-fact who they said they were as well as
allowing the Merchant to verify that the signature on the
Card was the same as the one on the voucher.

However, in January of 1987 the ball game changed when AT&T
introduced a low cost calling system called "Inward Watts" a
system of billing that in effect allowed your customers to
automatically call you `collect'; with that, and some
loosening of the requirement of having the customers actual
signature on the voucher, the wonderful world of `Direct Response
Marketing' was born.  (In fact it is this loosening of the
signature requirement that allows Compuserve and other such
services to automatically bill your Credit Card each month.)

The Direct Marketing segment of the business has grown from
about $500,000 in 1986 to over 3.2 BILLION in 1989 and
represents roughly 2.5% of all retail sales including
automobiles.  The Direct Marketing Industry ranks 16th in
all categories and falls directly behind Women's Clothing
and just ahead of Family Clothing in sales.
The greatest effect that all this has had on the Credit Card
industry is that in most cases the Merchant and the Card-
holder never actually meet.  This meant that anybody with a
`good' number can order merchandise from anybody they chose
and have it shipped anywhere they want to.

Now enter the Bad Guys.  They soon found out that all they
had to do was to get a good Credit Card account number, call
up their friendly Mail Order Merchant, place an order, give
the Credit Card number and have the merchandise shipped to
any address they choose.  Then they could either keep the
merchandise or sell it.

Meanwhile back on the Ranch.  The Merchant's Bank sends the
voucher for the merchandise bought by the Bad Guys to the
Card Holders' Bank who bills the Card Holders account and
sends the merchants Bank the money to put in his account.
All is well. Right?

WRONG!!!!! We got one mad Card-holder !!!!  He/she sees the
charge, screws themselves into the ceiling, and promptly
informs their Bank that they never made any such purchases
and they will not pay them.  So, where does the Bank go?
Back to the Merchant's Bank who in turn goes to the Merchant
and says  "Either prove it or lose it".

Here is where it starts to hurt; the agreement the Merchant
signed with the Settlement Bank, (that is the one who pays
the Merchant), states that all disputed charges are the
responsibility of the Merchant.  So guess who is going to
`eat' this one???

.... You got it!!!  The poor Merchant who has NO SIGNED
VOUCHER now has to substantiate the sale to the Card-holder.
All he knows is somebody called in an order and he shipped
it.  This is the same Merchant who now is out BOTH the
merchandise and the RETAIL PRICE of the merchandise that is
probably setting in a Pawn Shop somewhere or was sold at a
Flea Market.

Let me say something right here about charge-backs.  The
customer is complaining to their Bank.  The Bank is
listening to their Customer and unless you have a very good
paper trail you do not stand a chance of ever winning on a
charge-back.

Now lets' talk about the Merchant side of this equation.
The Merchant must now come up with the money to pay the Bank
back.  If he has it, then, all is well, but if not, or if he
has gone out of business and left no accounts open, then the
Settlement Bank will have to absorb it.  Not good banking
relations!!!!

To carry this even farther let us suppose that the Merchant
never got a called in order from anybody and for that matter
never even had any merchandise, all his business consisted
of was a telephone and a Merchant number.  He then started
calling all over the country getting people to buy his
wares, which consisted of thin air, and using the Card
Numbers he got on the phone orders he simply filled out
vouchers an took them to the Bank. In fact, he could have
simply got a bunch of Card Numbers from some trash cans and
started filling out Vouchers and carrying them to his Bank
Now let's suppose that he carried a bunch to the Bank, got
his money, and then skipped before the Charge-backs hit,
Here again the Settlement Bank takes it on the chin.  (I
have seen Banks take `hits' as high as $250,000).

This is basically why Direct Marketers of any size, Small
Home Based Businesses and Start-ups that actually have no or
very few tangible assets, have trouble getting Merchant numbers.

Something else; Many small Banks are acting as agents for
larger processing Banks and are bound by their rules.

If you are doing business with a large institutional type
Bank, you only do business at the teller window and have
never even met an officer of the Bank, then you probably
will not have much luck in getting a Merchant Card unless
you fit their profile to the `T.'  On the other hand,
however, if you are doing business with a Bank and a Banker
that knows you and supports your business and you have
proven to be a good and stable customer, you shouldn't have
much trouble getting your Bank Officer to help you get a
number. .

You may be asked to set up a reserve account to cover your
potential losses depending on your Bank's and your Banker's
attitude and their confidence in your ability to run your
business.

Personally, I will never place any account in any Bank that
does not have the officers in the same lobby as the teller
windows, nor will I do business with a Bank where the
officers are not among the `greeters' when I walk into the
Bank.  I am their customer; they are not mine.   I
have never understood why a business person will not shop
for a Bank the same way they shop for office supplies or any
other service.

I hope this helps to answer your questions if not E-mail me
your questions and I will give it another shot.

Ken Phillips
Compuserve
76040,2504

------------------------------------------------------------

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REPORT, 4734 E 26th St, Tucson AZ 85711


               MERCHANT CHARGE CARD STATUS FOR THE HOME OFFICE


  A growing number of work-at-homers in many states have had problems getting
merchant status so we can take Visa, Mastercard or Amex (American Express)
cards in payment for goods & services.

  In many cases, the basis for denial may be "working at home", "mail order
business", "no credit background", "no business back history" or even a direct
but meaningless "we simply don't want your business". Some banks have even
gone as far as to say that IF they granted merchant status, they wanted a 20%
- yes 20% - processing fee for each transaction from a mail order business.
Shockingly so, many foreign owned banks, notably smaller ones from Japan, have
willingly granted merchant status after their American counterparts ignored
the work-at-homer. What are the problems we face and how have some American
banks seen the light or been persuaded to grant such status?


HOW IT SHOULD WORK...

  Before we move on or you set about approaching a bank for merchant account
status, know how the system generally works. When you approach a bank to
receive a merchant account, you generally explain your business, give the bank
a fair estimate of weekly or monthly gross sales and sometimes negotiate for
the discount fee charged. You sign a standard  contract which usually states,
among other points, that all charges must be authorized through their computer
center (generally a toll-free number) and that you agree to process requests
for refunds (chargebacks) promptly. The only negotiable item is the discount
fee you pay to the bank. A new business is usually charged between a 4 and 5%
discount fee, but this varies with dollar amount of sales and usually drops as
your "charge card business" grows.

  When you accept the client or customer charge card, information on the
charge card form you fill out (transaction slip) is imprinted or
electronically transmitted to a clearing house. The charge account is debited
for the transaction amount (generally after being checked for credit approval)
and this amount is credited to your bank account (merchant account). At the
end of each month, you pay a discount fee for the merchant account privilege.
Depending on the merchant contract you signed, the average-transaction-amount
and the monthly total, the fee deducted from your account may range from 2 to
6% of your total monthly transaction amount.


BANKS AGAINST THE ROPES?...

  In answering the question "why is it sometimes so hard to get merchant
accounts?", we must take stock of the present and past histories of the
Merchant Charge Card Program, as it is generally referred to by the banking
industry. To do so in a compact manner, we state conditions and situations
simply and candidly:

- Many banks have been stung in recent years by mail order fraud schemes
whereby local or national business concerns have received charge card payments
from consumers and then simply disappeared from view. Many of those banks have
been left holding the economic bag, so to speak, and some have been
successfully sued by card holders in order to have money returned or their
charge accounts credited. Therefore many banks are presently very much afraid
of ANY business that rings of mail order types operations, regardless of how
long the business has been established or even the past business merchant
history.

- An increasing number of banks, be they locally or out-of-state owned, simply
do not want the business size typified by the Home Office. They feel that the
HO business has a negligible impact on their books and that the HO will never
amount to anything worth their interest (no pun intended). Therefore, some
will go through great lengths to discourage you from receiving merchant status
and may even turn you down citing absolutely meaningless reasons.

- You have no credit background. This reason for denial has been proven to be
more an excuse than a valid reason rooted in a firm base. The truth of the
matter is that many such banks expect you to be credit worthy in order that
they charge you a fee for their accepting, and making money off of, your
charge card customer or client payments. What these banks should really be
telling you is "your credit background means more to us than your business or
personal intentions and expertise"

- Some banks tell you that they have had too many charge card loses, sometimes
referring to the term "chargebacks". Such banks may have a valid point here.
It is no secret that far too many U.S. banks are taking a bloodbath in the
domestic credit markets (due to credit card fraud or excessive consumer debt),
in the international market (due to the massive debt incurred by other
countries that they have loaned to) and bad domestic loans (many times due to
the banks poor loan practices). Therefore, they are refusing many merchant
accounts as their financial position is either very poor or getting that way
in a hurry.

  Some banks have had to refund money to charge card holders, usually in the
form of crediting their accounts, if a merchant business fails to deliver
goods or goes out of business. This action falls under the term "chargeback"
and is a very raw open wound with many banks.

- Many banks refuse merchant accounts simply because they do not understand
you or your home office based business. Regardless of the ads you see, bankers
are not as expert as you in the technical, engineering and professional fields
and thus may not understand the first thing about your business background,
your needs or how you will make the bank money by having them accept your
clients charge card payments.

- Simply stated, banks are in business to make money. Regardless of their
advertisements or apparent attitude, if you or your business will not help
them further that goal, they will most likely not do business with you.


PUTTING ON THE GLOVES...

  Ok, many, if not most, of the "real" reasons that merchant accounts can be
hard to come by have been stated above. Now, what can be done in order to be
granted the needed merchant account?

- Create a "short form" business plan. Regardless of what the bank officer
says and how firm their denials of this next statement, the bank ALWAYS sees
you as a credit risk and as a person in business that "must prove to the bank
officer that the bank customer (in this case, you) does not need our money
(expressed as the need for merchant card status)". Hence, a short to-the-point
business plan will instill confidence in the bank officer you approach. Cover
such topics as a brief background of the business, how you intend to expand
and grow, how the merchant account will assist or contribute to this growth
and what assurances the bank has that you will remain in business for an
acceptably long time, thus limiting any chance of the banks liability as
regards your merchant account.

- Be willing to open a business savings account at the bank. Frankly many, if
not most, merchant accounts are just that -- a business savings account where
the deposits into that account are your customers/clients credit card services
or goods payments (usually termed "merchant deposits"). It is a well known
banking fact that any bank that extends merchant status to you always expects
you to have one or more interest bearing accounts at that bank for the life of
your merchant account. A second, but to the bank just as important, reason for
the savings account is that it provides a ready source of funds to protect the
bank should your business fail or otherwise not deliver on it's credit card
related promises.

- If at all possible, bring along "evidence of worthiness" when you approach
the bank. This generally might include a sample of your product, newsletter,
customer or client mailing list or a sheaf of orders waiting to be filled. As
odd as this may sound, this action on your part may many times "swing the
deal" with the bank as the bank now sees just how IMPORTANT your merchant
account is to them. Of course, if one happens to build nuclear powered devices
or a new idea refrigerator, bringing such samples with you may prove difficult
at best.


COUNTER-ACTIONS TO USE

Unfortunately, sitting down with the banking officer does not imply automatic
merchant status with them. You may have to employ "counter actions" designed
to sidestep the officers objections to granting merchant status:

"Business has no (credit) background" - It may be most effective, but
sometimes risky, to state to the officer, here and now, that your business is
not applying for credit, but is approaching the bank to bring the bank
business in exchange for your paying the bank the merchant transaction fee. In
exchange for the banks services, your business will be able to better prosper
and grow.

"Business is too new" - Similar to the above objection, but should be handled
by assuring the bank that you intend to grow and prosper with the banks
assistance. Statistics allow you to state that the merchant account is
required because a greater number of local or national customers and clients
are paying via charge card and that the merchant account is one of the best
ways you have to achieve your projected growth.

"Business is (too much) mail order" - When appropriate to your business, this
objection should be viewed as a valid one that will be hard to overcome.
Generally handle by asking the bank if they have incurred losses due to mail
order type operations and, most importantly, express willingness to open a
business savings account at the same time merchant status is granted. Also, if
possible, point out that a sizeable number of credit card payments will be
generated locally, in your city or state and that the mail order side will
grow in a well managed manner.

"You have a poor credit record" - If you DO have a poor credit record, try to
separate your credit history from the business if at all possible. If your
credit record is not "tip top", perhaps there was a bankruptcy in the
background report, remind the bank that past performance is not always a
reliable indicator of present and future actions. Again, remind the bank that
you are NOT applying for credit, rather you are paying THEM to perform a
service for you, in exchange for the merchant transaction fee you will pay
them.

"Transactions too small" - Generally, banks will hesitate to accept charge
cards if each transaction is under a certain total level, usually set by the
banks internal policy. For example if you publish a book or newsletter where
each payment (charge card transaction) will be, say, $21, be able to show that
having a merchant account will increase total-sales-per-month to the point
that the end-of-month transactions total a sizeable amount, $750 for example.
If at all possible, can you offer other products or services that will add to
the monthly transactions total?


OTHER MERCHANT SERVICE PROVIDERS

  A fairly recent event is the creation of private party electronic services
that allow you to sidestep much of the interaction with banks entirely, yet
still offer charge cards to your clients or customers. In general, you must
qualify by having a fairly sizeable monthly transaction average total, usually
at least $4000 per-month and agree to rent an electronic terminal that
connects to your telephone line in the same manner as a modem connects a
computer. Transactions are punched in and relayed for approval without the
business owner having to dial manually. The bank account of your choice is
credited with the charge receipts, usually within 48 hours.

  Under most of these "plans", after monthly rental of the terminal, perhaps
24 months at $15 to $20 rental per month, you own the terminal outright. In
exchange for terminal rental, the business pays a lower merchant transaction
fee rate, sometimes as much as 50% less than a bank would charge. If you
contact such a service, be prepared to advise them of the current merchant
transaction rate you are facing (check with one or two banks for the current
rates), number of transactions per month, average dollar amount per
transaction and the number of chargebacks you might entail.

  As of this report writing, we know of one respected long time business
representing this method: Irv Brechner Targeted Marketing, Inc, P.O. Box 5125,
Ridgewood NJ 07451 (201) 445-7196. There will most likely be other firms
involved in this activity in the not too distant future.

                                 - - - - - -

         (c) 1987 CompuSystems Management/The Home Office Newsletter
 All Rights Reserved PERMISSION TO QUOTE OR REPRINT MUST BE MADE IN WRITING