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SUCCESSFUL SMALL BUSINESS CONSULTING Merchant Account Options for Small Businesses O Doug Sleeter Mr. Sleeter is the founder of The Sleeter Group, a national group of accounting software consultants who serve small and medium-sized businesses. He is the host of the Accounting Solutions Conference and the author of several books including the QuickBooks Consultant's Reference Guide, and the leading market college textbooks "QuickBooks Fundamentals and QuickBooks Complete." For more information, call 888-484-5484 or visit www.sleeter.com. Doug can also be reached at Doug.Sleeter@CPAPracticeAdvisor.com. 28 28 April 2012 • www.CPAPracticeA ver the past several decades, credit card usage has grown steadily, both in the number of transactions and the dollar volume. According to the GAO (GAO-10- 45, Nov 19, 2009), between 1993 and 2007, credit card usage grew from 11 billion transactions, representing $620 billion dollars to 29 billion transactions, representing $1.9 trillion. The following data collected by www.creditcards.com shows the dollar volumes by card issuer during 2010, totaling nearly $2.9 trillion. Issuer American Express Discover cards MasterCard credit MasterCard debit Visa credit Visa debit Total 2010 Purchases (billions) $131.0 $92.5 $479.0 $333.0 $809.0 $1,050.0 $2,894.5 In addition to the growth in volume of credit card transactions, we're seeing an explosion of new technologies that businesses can choose from to allow their customers to pay for goods and services. It wasn't long ago that debit cards, prepaid credit cards, rewards/gift cards, were unheard of, and the pace of adoption of these new payment methods is mind boggling. So with new customer expectations and new technology platforms, small business owners have several options for how they will collect money from their customers. Merchant Accounts A merchant account is relationship a business creates with a bank that underwrites the risks and provides transaction services to merchants. When you set up a merchant account, you oſt en don't talk directly with a bank, but instead to an independent reseller or merchant processing company such APracticeAdvisor.com 17% 12% 28% 36% % Share Source 5% 3% American Express Discover MasterCard MasterCard Visa Visa as First Data, or to an Internet gateway such as Authorize.net. However, there is always a bank behind a merchant account. Banks are always involved with merchant accounts because credit card transactions always involve an EFT transfer of funds between banks. How Credit Card Trans- actions are Processed If the purchaser uses a credit card, the transaction creates a transfer from the purchaser's credit card account at their issuing bank, to the merchant's bank, resulting in a higher balance due from the customer to their bank. Simi- larly, if the purchaser uses a debit card, the transaction creates a transfer from the purchaser's checking account at their issuing bank, to the merchant's bank, resulting in a lower balance in their checking account. Of course there are fees involved, and there are other parties involved such as card associations (Visa, American Express, MasterCard, Dis- cover, and others), the processors (First Data, Payment Tech, and others), and the internet gateways (Authorize.net, PayPal, and others), all of whom provide services to authorize and process transactions. So to expand on the example above, when a purchaser uses a credit card, the transaction is swiped on a POS terminal or entered into an eCommerce shopping cart. T at initi- ates a secure communication with an internet gateway and/or a processor, which, if the transaction is approved will initiate the transfer from the pur- chaser's credit card account at their issuing bank to the merchant's bank. And the gateway and/or processor charges a fee for their services, usually a monthly fee, possibly combined with transaction fees.