Going plastic: here's how to gain merchant status for your small firm so you can accept major credit cards

Nation's Business, July, 1995 by Rosalind Resnick

Here's how to gain merchant status for your small firm so you can accept major credit cards.

When Natalie Stetz launched her continuing-education business last year, the former technical writer was the one who ended up getting an education.

Unaware of the difficulties small businesses often encounter in obtaining merchant status--the ability to accept credit cards from customers and clients--Stetz printed up thousands of catalogs encouraging customers to pay by Visa or MasterCard.

"I thought it was money coming in and the bank would be happy to collect it," says Stetz, owner of the South Florida Exchange, in Fort Lauderdale. "Then I called a broker [who helps small businesses get merchant status] at the recommendation of a friend, and he said not to waste my time because I'd never be approved."

The reason: Back then, Stetz operated her business from home rather than from an outside office, and she took orders for seats in continuing-education classes over the phone. That practice--combined with her lack of a business track record--made her, in many bankers' eyes, a high risk for credit-card status.

As a result, Stetz. says, she missed out on some sales because customers weren't offered the convenience of paying by credit card when they phoned to sign up for a course. "Somebody calls and wants to register and has the catalog in their hand," Stetz explains. "Then they put the catalog down and go on with their day and forget to send the check."

Stetz's problems are not unusual. Though it's not known exactly how many small businesses are turned down for merchant status, they clearly face long odds. In the view of many banks that issue Visa and MasterCard credit cards, small companies are more likely to present collection problems than are larger, better-established businesses. Banks often assume that orders that come into a home-based business will be placed by phone or mail, making it impossible for the merchant to verify the validity of customers' credit cards. Banks also fear that small companies are more likely to fail or resort to fraud.

David Strider, president of Banc One POS Services Co. in Columbus, Ohio, acknowledges that "it's probably tougher than it needs to be" for small businesses to win merchant status. "Our customer demographics are in the small- to middle-market arena, and if we can serve them, we do," he says, but "we have credit standards that we abide by."

Judy Hoffstein, American Express' vice president for inside sales and account management, puts it this way: "The main reason small businesses are scrutinized is because we, as a credit-card company, have to pay the merchant first, and then we have to wait for the customer to pay us.

"If the customer decides that he wants a refund or isn't satisfied with the product or the service provided," she continues, "we have to go back to the merchant. We need to be absolutely certain that merchant is going to be there the next week."

Although it can be difficult for a small firm to obtain merchant status, it's not impossible. Companies that take the time to document their creditworthiness can often win over skeptical bankers.

Even merchants who strike out with banks can frequently gain merchant status through brokers called independent sales organizations (ISOs), which act as middlemen in helping small firms obtain merchant status from banks.

In fact, banks typically work closely with ISOs, sometimes referring small businesses to such organizations and other times using ISOs to serve markets that the banks cannot reach profitably. "Banks and ISOs work hand in hand," says Strider, noting that every merchant recruited by an ISO still must be approved by a bank before it can accept credit cards.

Moreover, banks and credit-card companies are aware of the rapid growth in the number of small and home-based businesses. American Express, for one, now has a small-business outreach program.

"I'm not guaranteeing that every single home business or small business will qualify," Hoffstein says, "but we will take into consideration all aspects of a business. The fact it's a home business will be a factor in our decision-making process; it won't be the only factor."

Winning merchant status can be achieved in as little as a week, or it can take weeks--or even months, as it did for Stetz--if you run a home business and the bank's account executive needs to visit your house to confirm that you run a legitimate concern.

Once merchant status is approved, the credit-card issuer typically withholds a small percentage of each charged amount as a fee for the service. Bank fees for Visa and MasterCard transactions can range from under 2 percent to as much as 4.5 percent of sales plus 25 to 30 cents per transaction; there can also be monthly servicing fees of up to $10. Charge-card companies typically do not charge a monthly fee, but they take a larger percentage of sales--up to 5.5 percent, for example, at American Express.

Small businesses with relatively low sales typically pay higher percentages than large department stores or nationally known catalog merchants.