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 ------------------------------------------------------------ I am going to put in a little commercial here for my book, THE ENTREPRENEUR'S FIRST READER, a left handed look at just what starting and running a business is all about. This book will give you a street level insight into the real world of starting, running, and most importantly, keeping a business. THE ENTREPRENEUR'S FIRST READER can be ordered from SunBuster Press, 4314 49th St, Lubbock, Tx 79413. For a limited time, they are offering copies of the book for $9.95 each (Including Shipping) after 8/1/91 the price will be $12.95 (Including postage). You also have my personal guarantee that if you buy a copy and you don't save more than ten or twelve bucks send it back and I'll see that your money is refunded in full.