MERCHANT ACCOUNTS: HOW TO SELECT AN AGENT or 'FACILITATOR'
by Joe Gaynor

While any dispute/debate has been put to rest as to the validity or need of a business to accept a customer's credit card in this, the Cashless Society, there is much misinformation surrounding the criteria on which one should base the selection of a vendor, agent or provider of such services.

As has been suggested in other forums, the local bank is still the first place to start. They are a wealth of information and should provide the basis of understanding how the system works, fee structure and what it takes to 'qualify'. The bank may even be a source of/for a referral to an Agent or other provider since banks don't accept many 'direct' accounts these days. They are formidable in their approach: they require financials, business & personal, must 'see' profit, want only businesses who have been around for a number of years and generally are quite 'invasive'. Additionally, since funds generated by use of credit cards today are deposited directly into the Merchants business bank, the bank benefits as the depository anyway without incurring any of the inherent 'risks' associated with the system.

For purposes of this writing we will refer to the source of obtaining a Merchant Account as an 'Agent'.

The agent is really a facilitator by and through which a business initiates, processes & acquires Merchant Account status. There have been opinions expressed as to who a prospective account should be placed with &/or processed by or through. Some of those suggest going to a 'Direct' provider rather than deal with an Independent outlet or 'Agent' so as to avoid any inherent 'conflicts of interest'. The conflicts suggested come about by the offering/providing of equipment/systems or software needed to facilitate access to the system of generating, processing and validating the use of credit cards. Virtually all outlets whether 'Agents' or Direct sources operate on a system whereby their remuneration (earnings) are based on commissions. Therefore a conflict arises because of the ability to maximize commissions by 'steering' a client to or toward a particular line of equipment or method of financing a transaction.

Some would argue that dealing with an Agent provides greater flexibility of offerings, sources and alternatives. Others believe that a 'dedicated' party or business representing a single source is more 'expert' in their field having to learn but one way to provide the service. Some would suggest the argument is similiar to the process of selecting an Insurance Company or provider in as much as a 'brokerage' doesn't restrict their offerings to a single source giving, as it were, many alternatives to the consumer. We will explore the pros & cons of how to chose a facilitator, whether 'Direct' or through an Agent.

With the proliferation of the Information Age, the Super-Highway of Communication ala the Internet along with Electronic processing in the exchange of Commerce, the preferred medium of exchange is the use of credit cards. On this subject there is little debate. We won't delve into the political elements here, but will attempt to address the question at hand; the selection of a source to facilitate establishing the Merchant Account.

Some of the 'Directs' would include organizations such as CardService, Alliance, EMS, elements of the ECHO system, et al. All of these are essentially sales organizations who, by prior arrangement, have the clients transactions processed by/through a specific participating bank facility. They are also very heavy 'recruiters' of independent (sales) contractors. It is not an uncommon experience for their clients to be required to maintain specific account balances or be charged a minimum monthly 'fee' for use or access to their accounts funds. Some of these organizations require an account 'reside' in their participating bank requiring a Merchant to manage yet another bank account. Funds are accessed by use of a checking account requiring a Merchant to write him/herself a check to  secure use of funds generated by the Merchant Account.
Some would choose to refer to 'Directs' as the processor or bank facility who manages the Merchant Account. Other than the 'local' bank, most of these will refer an inquiry of services to their sales department or Agent. Again, most of these organizations; State Bank of Kentucky, American National Bank (IL), Humboldt Bank (CA), Bank of Beverly Hills, MCC (TX), et al, retain Agents as the procurer's and servicer's of/for Merchant Accounts.

Agents normally establish an automatic transfer of funds to the Merchants own business account directly, negating the need to write checks on yet another account. Funds generated by the use of customer's credit cards therefore are deposited directly into the Merchants account within 48 hours of a transaction. Most Merchants prefer the automatic deposit mechanism, not having to 'remember' to transfer their own funds into an operating business account as well as not granting someone else the 'use' of their monies (for which the Merchant does not receive the benefit of earned interest).

There are those who still believe 'The' bank, local or national affiliates; Wells Fargo, Bank of America, Citibank, etc are 'the' sources of choice. All are correct and appropriate according to one's particular circumstance & disposition. Add to the mix the various Agents, who may indeed represent these same outlets, as well as 'other' sources which we will call or refer to as Brokers. The scariest of these are the Brokers. They 'hire' sales reps on an independent basis, commission only, process applications in a rather generic form then 'shop' the market to gain placement of the account with a provider. The provider may be referred to as a clearing-house, but all sources must, of necessity, employ the services of a participating bank (a processor) who has access to the Federal Reserve System. The banking system is the heart of the program and of electronic processing which makes all the 'magic' possible. Again, we won't dwell on the mechanics, suffice it to say all transactions must be accepted/processed by or through such a facility.

The problem with dealing through a broker is that they will/can facilitate the Merchant Account for the client, but in so doing usually charge a healthy application fee, some as high as $350. In addition, they will 'require' the client (Merchant) to obtain their equipment or software through them at pre-set prices/costs. This arrangement is secured by an instrument, agreement, the client must sign at inception. The deal is that if the Broker obtains the account for the client the client must agree to having their equipment provided by the same source. So far so good (especially if the client has been turned down by other sources), but then the client is presented with a 'deal', usually a lease, costing  3, 4 or more times the market value of the goods. The discount rate comes into play too. Since the Broker essentially 'preys' on those who don't have a 'sterling' credit history, the client believes he/she doesn't have a choice. For this they pay 50 to 100% more in basic rates plus pay much inflated prices for their equipment.

Discount rates, for the moment, deserve a mention. 'Discount' is a misnomer since it is what a Merchant pays, as a percentage, on all transactions. An excellent rate may be 1.5%, perhaps even less in the case of a high volume chain operation dealing essentially in retail trade. Retail is where the Merchant 'sees' the customer & gains possession of the actual card, can 'see' the signature and provide a receipt of the transaction. In this case the 'best' rate applies because the risk of fraud is much less. Again, electronic processing comes into play; the card is inserted into a terminal and the transaction is authorized & approved within seconds, all on-line.

A typical rate for the New, Small Home Based Business will be somewhere between 1.5 and 2%. It should be remembered the difference between these numbers, 1/2%, represents .25 (cents) on a $50 transaction. not exactly a deal-breaker. The rate only becomes a significant factor when a certain volume is achieved. On $2500 the difference is but $12.50, but on $25,000 it goes to $125. Everything is relative and one should not base one's decision on only the absolute lowest rate possible. The business, in its deregulated state, is not static, is quite dynamic and changing processor's is not uncommon particularly when one's business grows to a point where leverage can be exercised in order to obtain better rates.

Again rates, by & of themselves, are but one factor. They do vary from business to business or type of business. Mail/Phone Order is somewhat troubling, fraud and the evil 'chargebacks' are more prevalent. Customers return more goods through this means and some even claim the charge was not authorized (in the first place) and this puts a black mark on the Merchants record. Merchants play games too. If they need a certain amount of funds they have the means to 'transmit' or generate funds through family, friends or foe alike. There is risk inherent in the system since it is not possible to verify all transactions at the point of sale. Time catches up to those who employ devious measures, but often after it is too late to recover. Like all facets of the economy the actuarials are busy in this area and have developed 'profiles' in the various categories of business & trade. It is the conclusion of the resulting formula,  a certain trade has more likehood of misuse than another. The Mail/Phone Order business therefore commands a higher rate usually in the range of 2.25 to 2.5%.

Rarely does an account go to a higher level, but it is not uncommon that in certain categories of business and/or in cases where credit history is of such a greater risk, a deposit or a hold-back is required. Hold backs don't usually go beyond 5-10% of funds transacted and after a period of time can be eliminated altogether.

Now, back to the question at hand. How does one determine a good, reliable & honest source with which to process their Merchant Account application? One has to perform a certain amount of diligence. Hopefully this writing will help and offer some of the ways to make an informed choice.

The Agent - this party is an extension of the processor's service. Must be registered with an ISO/MSP (industry jargon, means official & recognized) and has entered into an agreement to uphold the standards & stipulations of the Visa & Mastercard International organizations rules & regulations. Is subject to termination and 'banishment' from the trade for any infraction such as misinformation and generating fraudulant Merchant applications. The Agent cannot engage in any effort to simply sign-up Merchants for the purpose of obtaining accounts by either omission or commission. Cannot submit applications in an incomplete manner; must perform due diligence in 'qualifying' a prospect, must inspect the business premises and attest to its authenticity.
An Agent should be able to provide his/her agent number and the identity of the processor with whom they are affiliated. In some cases this may be more than one.

The Agent should be knowledgeable; knows business applications, can perform programming of terminals for the Merchant and offers various plans/programs for acquiring equipment/sytems.

The registered Agent is the only one who can sign-off on an application, affirming to such as a site survey. A site survey is yet another requirement of the Visa/Mastercard organizations. It has been employed to effect an element of control in the reduction of fraud. If an Agent cannot physically visit a site, a survey company may be employed for the purpose.

An Agent may or may not be able to provide actual references of customers due to the confidential nature of the information he/she is privy to in providing the service. Nonetheless, the effective Agent is one who has a constant & consistent source of referrals provided by customers because of fair dealings and integrity exercised.

The Agent is a 'real' business, has a business license, location, phone/FAX numbers and possibly a presence on the Internet/Web.

The Agent's status can always be verified by his/her principles (source/processor) with a phone call. Any representative who is reluctant to provide his/her processor's name & phone number/contact should be avoided.

The Agent is a full service provider; provides the Merchant Account status and fulfills the need for equipment/systems/software. All Agents should make available the purchase price for any given item of equipment. The Merchant is NOT required to only lease a system. The Agent, on the other hand, is equipped to offer/provide 'multiple' means/methods of addressing the particular clients needs; leasing for various periods of time, not a 'fixed' program, 24, 36 &/or 48 month plans/programs should be available. Any representative who ONLY provides a single plan should be avoided. Note: an agent must purchase his/her equipment from a dealer for consequent sale or lease.

The first duty of the Agent, besides obtaining the Account for the Merchant in the first place, is to point out the benefits of a terminal/unit or software applicable to the Merchants business, regardless of price/cost/commission considerations. When asked, the Agent should always respond with a full array of choices pointing out the pros & cons of the various brands.

Fees: An Agent is an Independent Contractor, even though he/she has signed agreements with their sources (processor's). They pay their own taxes and all business associated expenses; auto, phone, printing, postage, rent, etc. Accordingly, most charge a fee for their service. These should be in the range of $100 to $200. Rarely should these figures be any higher. Most processor's charge an application fee. The range is from $50 to $195. Most Agents include the processor's fee in their originating charge. If an Agent charges $125, $75 of that may go to the processor. Nonetheless, these fees are always negotiable. Any originating fee should be refundable in the event the Agent cannot obtain the Merchant Account. Any credible Agent will honor this 'arrangement'. There are but a few instances where an Account cannot be established. Two come to mind, but are not always locked-in-concrete; 1., a client who is in bankruptcy (or has not had the matter 'released'), 2., had a Merchant Account at one time and it was terminated (usually for 'cause').

If an Agent cannot confirm Merchant Account status within 7-10 days, obtain a refund of any monies paid and go get another Agent. An affirmative response doesn't take weeks, let alone months. This is the purview of a Broker and a client does not want his/her account 'shopped' around.
Again, an Agent is knowledgeable. Knows about check clearance programs, ATM & Debit card service(s) as well as Smart Card applications and PIN operations and where they apply. As well, an Agent represents ALL major credit cards; AMEX, Discover/Novus, Diners, Carte Blanche, etc. A Merchant should not have to come back to a situation, after-the-fact, and find that he/she does not have the ability to accept ATM cards because they were sold the wrong terminal/equipment. Again, any Agent worth their salt is a full service source; has a full line of equipment to offer the Merchant. This includes ALL goods & supplies, manual operating imprinter's (now a requirement as back-up), sufficient knowledge about telephone line installations (no, a separate line is not necessary, but sometimes a dedicated line to a machine is advisable if in a 'busy' environment) and one should be aware of how PBX's operate as well as such as call-waiting and how that can mess-up an on-line transmission in the middle of a transaction. There are a myriad of 'things' the Agent must be aware of and as an Independent Agent he/she can be a vital source of correct and accurate information.

So, the Agent must be open, honest, able to show 'credentials', disclose who their ISO/MSP is (Processor), know the equipment and offer goods for sale as well as on lease with full disclosure as to the various plans/programs available to the prospective Merchant.

We won't spend time here on the intricacies of leasing, other than to suggest that understanding of 'factors' would be well worth any Merchant's time if leasing is appropriate in a given situation. Agents are well versed in this area.

Bottom Line: Any Agent/source can obtain Merchant Account status  for any credible applicant at a reasonable cost. A source can arrange an Account for as low as $500-600 total, sometimes less. (Equipment can be bought from a business that closes, for instance, at very reasonable cost, but is 'as-is', where-is & without warranty and must be able to be reprogrammed). Once again the Agent is the best source of where goods can be acquired and at rock bottom prices, but what is an Agent worth? What's the story about something called AVS (Address Verification Service) & the upcoming year 2000 'change over'? Will equipment acquired now be applicable to whatever changes might be necessary to accomodate anticipated upgrades in the future?

What is the relative worth of improving cash flow, increasing sales and consequent profits? The means/methods to engage in electronic processing incurs some costs. Much like the necessity of various items or pieces of equipment needed to run/operate a business, an electronic processing system is fast becoming a requirement, if it is not already. What would we do without copiers, PC's, FAX's and other 'tools' with which we conduct commerce? Just as in any other area of 'office equipment' the prospective buyer must learn the salient facts and make an informed decision. The qualified Agent, in this case, can be a valuable instrument in achieving optimum results.

(Joe Gaynor is a principle in Gaynor, Foley & O'Brien, a registered Agent for Worldwide Electronic Bankcard (WEB) an ISO/MSP  of California. Contact them at P.O. Box 608, Mt. Aukum, CA.,  95656; tel 916/672-3344 fax 916/620-4346)