Merchant Services: Prime Yourself: 10 Things to Know


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Merchant services require strong customer support and a clear plan of action.

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Merchant Services: Prime Yourself: 10 Things to Know

  1. 1. Merchant Services Market Primer Focus Research Finance Group August 2009 Focus Research © 2009 All Rights Reserved
  2. 2. Introduction If you’re searching for a clear and thorough explanation of merchant services, you’re in the right place. Our Merchant Services Market Guide is designed to provide business decision makers and other potential buyers with basic knowledge about this exploding market. The Market Guide begins with the most important facts about the merchant services industry: Table of Contents 1 Merchant Services Basics: Market definition and the top 10 things to know about network storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 3 2 Market Summary: Market trends and vendor landscape . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 6 3 Product In-Depth: Products and features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .p. 8 3 Tools: Glossary and checklist. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. p.12 Merchant Services Market Guide Focus Research ©2009 2
  3. 3. 1 Merchant Services Basics Merchant Services Defined Long gone are the days of swapping services for a herd of sheep or making purchases with shiny gold coins. In today’s increasingly cashless society, businesses must be able to accept credit card and debit card payments from their customers. Enter merchant services. By creating a special account linked to a credit card processor, a merchant service essentially routes money from a customer’s bank into your merchant account. Customers benefit by gaining access to a fast and convenient payment option. Businesses, on the other hand, are guaranteed payment with minimal fuss as monies are simply transferred into an account. Prime Yourself: 10 Things to Know About Merchant Services 1. Merchant services improve cash flow. Unlike checks, which financial institutions may hold for weeks, merchant services can improve cash flow by guaranteeing timely, automatic deposits to a business account. 2. Merchant services enable globalization. As more and more businesses expand beyond bricks-and-mortar, the need for merchant services that enable companies to accept payment from customers located in other countries has reached epic proportions. Fortunately, many merchant services help businesses process payments from around the world, thereby extending a company’s reach — an especially valuable benefit for small businesses with limited resources and marketing funds. 3. Merchant services boost sales. In today’s paperless society, credit cards are outcompeting cash and checks as a preferred payment option. In fact, from 1999 to 2005, credit card terminals tripled in number to 6.8 million. And studies have shown that retail stores displaying their acceptance of credit cards saw cash sales increase by 29 percent, not to mention that consumers typically spend more when using credit cards. 4. Merchant services cut costs. According to the Federal Reserve, processing credit cards is far less expensive than processing checks — a financial plus for small businesses. 5. Merchant services can combat fraud. From today’s stringent PCI (Payment Card Industry) Data Security Standards requirements to ill-intentioned hackers, companies are always looking to minimize their exposure to fraud and security breaches. Many merchant services providers have heeded the call by offering safeguards such as the SSL (Secure Sockets Layer) protocol — technology that encrypts credit card information for safe and secure processing. Other safety measures include access to fraud prevention programs, fraud reporting centers and chip-based payment platforms. Merchant Services Market Guide Focus Research ©2009 3
  4. 4. 6. Merchant services require strong customer support. Fail to process a customer’s credit card correctly and you won’t only lose a sale — chances are you’ll lose a customer as well. To avoid such a fate, many providers offer customer support services that can help companies deal with issues in a timely and efficient manner. If possible, establish a single point of contact with a merchant services vendor for personal and speedy service. And remember that many third-party providers don’t offer customer support, instead asking that businesses contact their alliance partners or financial institutions for assistance — an arrangement that could impede a prompt resolution to your problem. 10 Things to Know About Merchant Services 1. Cash flow will be more reliable because of timely deposits. 2. You can extend your company’s global reach. 3. Sales may rise because customers are shunning cash. 4. Payment-processing costs are cheaper than checks. 5. Fraud should be less of a problem because of industry safeguards and standards. 6. You may need to provide your own customer support to ensure prompt transaction resolutions. 7. You’ll need to comparison shop because of the differing fee structures. 8. You will improve customer relations by speedier sales and loyalty programs. 9. Don’t expect instant funds transfers. 10. Records management will be easier. 7. Merchant services costs vary. Although their intention is to help you process customer payments, today’s merchant services providers will have you coughing up dough of your own. Transaction fees, authorization fees, statement fees, discount rates, termination fees — they’re all charges that vary among vendors. Shopping around for the lowest rates can help you get a better handle on the numbers. Be sure to have fees clearly stated in writing before signing a contract. 8. Merchant services bolster customer relations. The right merchant service can help you move beyond checkout times and transaction volumes to actually capture real-time information about your customers that can help with sales analysis, promotion planning and loyalty program design. What’s more, many merchant services offer customers incentives such as prepaid programs and special gift card offers to spur sales. Merchant Services Market Guide Focus Research ©2009 4
  5. 5. 9. Merchant services take time. Just as Rome wasn’t built in a day, a business isn’t likely to transfer funds into your account overnight. Depending on the service provider, timeframes may vary and expectations should be clarified before signing a contract. 10. Merchant services help with records management. A dog-eared general ledger is a far cry from most of the record-keeping capabilities being offered by today’s merchant services providers. The right solution can help businesses keep better track of financial transactions, cash flow and customer details — data that can come in handy during tax time. Merchant Services Market Guide Focus Research ©2009 5
  6. 6. 2 Market Summary Market Evolution Credit card processing has come a long way since the days of leviathan-sized imprinters and phone-based authorization services. According to Encyclopedia Britannica, credit cards originated in the United States during the 1920s, when companies began issuing them to customers. Early on, credit cards involved sales directly between a credit card provider and its customers. Around 1938, companies began accepting each other’s cards. And twenty years after that, the first revolving credit card debuted, which allowed cardholders to pay off their card balances in installments in exchange for interest fees. Since then, electronic credit card processing has evolved significantly and now encompasses everything from point- of-sale terminals, wireless devices and support for online transactions. In the flesh, over the phone, via the Internet — they’re all platforms supported by today’s providers of merchant services. But while merchant services have long helped companies increase productivity, boost sales and cut operational costs, more and more businesses are searching for solutions that are customer-centric and drive revenue growth. No longer is shortening a customer’s checkout time a top priority among merchant services enthusiasts. Rather, as companies scramble to foster cross-channel selling environments and weather tough economic circumstances, retailers are rethinking their approach to merchant services. In fact, many small businesses are now viewing merchant services as a marketing vehicle — an opportunity to gather data on customer buying behavior, manage inventory, empower store representatives, enhance customer service and establish strong loyalty programs. Forget about speeding transaction times with a handheld terminal. Today’s companies, particularly small businesses, are making pin pad enhancements that automatically upsell consumers on complimentary offerings and place inventory and product details at cashiers’ fingertips. Fortunately for small businesses with limited financial resources, there’s a strong business case to be made for customer- centric merchant services. That’s because recent innovations in merchant services are helping companies achieve revenue growth through enhanced customer satisfaction, increased transactional volume and cross-selling opportunities. Market Trends Merchant services may be evolving at record speed, but companies must take their time in deciding how to modernize their software systems and hardware equipment. Here’s what you need to consider: 1. Replacements versus upgrades: As merchant services evolve into mission-critical customer-centric tools, many companies are questioning whether it’s time to replace their entire credit card processing systems, POS devices and Web-based software with the latest and greatest solutions. But experts warn against ripping and replacing entire Merchant Services Market Guide Focus Research ©2009 6
  7. 7. merchant services packages. That’s because reinventing the wheel can be a costly endeavor, particularly for small businesses with limited resources. Instead, it’s worth asking your vendor what equipment upgrades are currently available while at the same time establishing a slow and steady migration path. 2. The cost of integration: Transforming a POS credit card processing terminal into a device that can track customer buying habits and inform sales representatives of cross-selling opportunities involves considerable integration costs and headaches. After all, such a transformation requires linking merchant services equipment with front- and back-end systems such as ERP and CRM software. Getting these disparate systems to talk to one another is a timely and expensive undertaking, not to mention financially out of reach for many small businesses. 3. Uniform versus best-of-breed: When it comes to modernizing your merchant services, many companies wonder whether it’s best to stick with a single vendor or cherry-pick best-of-breed solutions from an assortment of providers. Though there isn’t a clear-cut answer, building a relationship with a single merchant services vendor can help a company get its system up and running quickly, as well as ease integration headaches. A diversified merchant services ecosystem, however, can prevent an enterprise-wide catastrophe in the event of a system glitch by enabling a company to localize the problem and apply a quick fix. Vendor Landscape These days, a variety of vendors offer merchant services, including financial institutions, merchant service providers and independent third-party providers. Industry stalwarts such as VISA, MasterCard and American Express all have comprehensive merchant services. Many banks, like Bank of America, provide merchant services that cater specifically to small businesses by offering low credit card processing fees and rebates on equipment upgrades. And then there are a bevy of third-party hardware and software vendors. NCR, for example, offers fixed and wireless POS (point of sale) solutions including POS terminals, ATMs and bar code scanners for retail, financial, travel, health care and hospitality sectors. With over 15 million terminals deployed across 125 countries, Ingenico peddles a wide range of payment solutions including contactless, wireless, pin pads and countertop terminals. And payment processing company First Data boasts everything from credit and debit transaction processing services to fraud-protection solutions and mobile-payment devices. With such a wide array of providers, selecting a solution that fits your business needs can be overwhelming. The important thing to remember is that no merchant service is an island. Credit and debit card processing involves sophisticated partner ecosystems in which retailers, financial institutions, hardware developers and software providers work together to route money from a customer’s bank into a company’s merchant account. Secondly, different business situations demand different types of merchant services. Some small businesses, for example, may not qualify for a financial institution’s merchant services package, but they might discover that the terms set out by a third-party provider are more favorable. Others may prefer a credit card company that lays claim to lower rates, strong security measures and a proven track record. Merchant Services Market Guide Focus Research ©2009 7
  8. 8. 3 Product In-Depth Product Features Although services can drastically vary, there are some common product features every merchant services solution should provide. These include: POS systems: Ideal for a wide array of industries including retail, automotive and mail-order, most POS systems support credit, debit and gift cards; contactless payments; and electronic check payments. Mobile POS terminals: Supported by a wireless communications network, mobile POS terminals let companies process payments on-the-go, from gaming tables to trade shows. Such localized service is a boon to customer support and allows businesses to expand their operations quickly and cost effectively. PC-based POS systems: By adding specialized printing abilities, data-input capabilities and cash-handling features to a basic PC, a PC-based POS system can leverage an existing Internet connection to cost effectively process credit card transactions from a familiar and user-friendly interface. Internet-based processing solutions: Adding an e-commerce element to payment processing is an ideal way for small businesses to reach a global audience and significantly boost sales. Using an Internet connection to process credit card transactions, most Web-based processing tools also allow for the quick handling of orders and can provide real-time inventory, as well as customer relationship and service management data. Merchant cash advance services: Delivered quickly and without a mound of paperwork, merchant cash advances provide companies with fast and easy funding as a lump sum payment in exchange for a share of future sales. Vendors A variety of vendors provide merchant services, including financial institutions, merchant service providers and independent third-party providers. Your current business situation can help you determine the right fit. Here are a handful of options: Banks: If your business is already up and running, chances are you can set up a merchant account with your current bank. By expanding customers’ payment options to include credit cards, debit cards, electronic checks and gift cards, banks can help streamline business operations and increase revenue. Of course, transaction rates vary among banks, so it pays to comparison shop. And many financial institutions bundle merchant services in packages, so be sure to make inquiries. Merchant Services Market Guide Focus Research ©2009 8
  9. 9. Credit card companies: Credit card companies such as VISA and MasterCard help companies process payments for some of the most widely held personal and commercial payment cards. Funds are credited to a merchant account almost immediately for fast access. Also, many of these services include sophisticated security features that protect businesses from fraud online, over the phone and at POS (point of sale). There are differences among merchant services being offered by credit card companies today, however. For example, some may require you to establish an account with a third-party financial organization while others are willing to work directly with companies. What Are Merchant Services? A merchant service essentially routes money from a customer’s bank into your merchant account. Customers benefit by gaining access to a fast and convenient payment option. Businesses, on the other hand, are guaranteed payment with minimal fuss as monies are simply transferred into an account. Common providers of merchant services are: • Your own bank • Credit card companies such as Visa and MasterCard • Registered credit card brokers Specific merchant services include: • Credit card processing • Point of sale systems • Merchant cash advances Third-party providers: Offshore merchant accounts and registered credit card brokers are examples of third-party providers offering credit processing services. These vendors often don’t process the transactions themselves and may charge higher rates that are out of reach for small businesses. Another factor worth considering: because third-party merchant service providers are not as regulated as traditional financial institutions, there may be greater risks involved. Once you’ve selected a credit card and debit card processing provider, there are plenty of different types of merchant services to choose from. These include: •  Credit card processing: A merchant account set up at a financial institution or third-party provider that receives and manages the proceeds of credit card transactions. Merchant Services Market Guide Focus Research ©2009 9
  10. 10. •  POS solutions: A high-tech replacement for a cash register, these devices not only process payments but can record customer orders, collect customer data and manage inventory. •  Merchant cash advance: A common alternative to traditional bank loans, this service lets businesses receive cash in exchange for the purchase of a small portion of your future credit card receipts. Once approved, a cash advance is deposited into your business checking account for immediate access to funds. •  Internet/ E-commerce: This service lets companies with Web sites accept online, phone, fax or mail orders, and process these payments through a Web site. Special features may include detailed transaction reports and account management tools. Costs With scores of merchant services providers vying for your business, it pays for companies to shop around for just the right solution. Banks, credit card companies, third-party providers – they all offer merchant services packages at varying costs. For this reason, companies would be wise to play providers off one another to land the most attractive deal. In some cases, variables such as transaction fees and discount rates may even be negotiable. Another way to cut credit card processing costs is to avoid package plans. Many merchant services providers bundle offerings such as software upgrades, paper, backups and email marketing tools. While these packaged goods are often offered at reduced rates, they can be pricey for companies that don’t make the most of their value-add features. Avoiding chargebacks is yet another way to reduce fees. A chargeback occurs when a customer requests his or her money back from a service or product provider. In turn, the merchant services provider, to cover the costs associated with processing a chargeback, levies a fee of upwards of $50 per chargeback. Fortunately, there are steps companies can take to avoid chargebacks. For example, many companies ensure that the name of the business matches that which will appear on a buyer’s monthly statement for easy recognition. And in the case of a Web-based business, it’s always wise to rely on a verification system that electronically compares a customer’s billing information with a card holder’s records and personal data. But looking for ways to shave dollars and cents is just one part of the credit card processing equation. Making the most of this widespread merchant service also entails leveraging important data for enhanced customer service. For example, many businesses are now viewing credit card processing services as a marketing vehicle – a unique opportunity to gather data on customer buying behavior, manage inventory, empower store representatives, enhance customer service and establish strong loyalty programs. For example, imagine arming an electronics store’s employees with a hand-held order processing device that links with the store’s inventory management system. When a potential customer asks a store employee if a particular product is Merchant Services Market Primer Focus Research ©2009 10
  11. 11. available, that device can automatically inform the store representative if the product is in stock. If that product is out of stock, the employee can increase his chances of making a sale by checking to see if a similar product is available for purchase, or when a product is scheduled for delivery. As a result, by linking a merchant service with a business’s back-end system, a company is able to reduce the risk of a lost sale while increasing customer satisfaction. Web-based businesses can also benefit by leveraging data for the sake of enhanced customer service. Take, for example, the Web-based business whose credit card processing module is connected with a built-in CRM system. The possibilities are endless. For example, by identifying customers via their credit card numbers, a company can up-sell products based on a person’s past buying behavior or reward that repeat customer with loyalty points that can be redeemed both online or in-store. Why Businesses Buy There are plenty of reasons companies turn to financial institutions, credit card companies and third-party providers for merchant accounts. Here are just a handful of benefits: •  Greater customer satisfaction: In today’s tough economic times, the customer is king, which means being able to accommodate a buyer’s choice of payment options. By being able to accept a variety of payments, a company can boost its sales and increase customer satisfaction levels. •  Extending your reach: While most small business operate a limited number of branch locations, Web-based POS solutions can help extend a company’s global reach and allow it to tap into previously undiscovered markets for a fresh clientele. •  Collecting data: Many merchant services can be integrated with sophisticated ERP, CRM and inventory systems. The result is an ecosystem that grants companies access to data on everything from consumer buying habits to real-time inventory levels. •  Reduced costs: Merchant services can cut costs. In fact, according to the Federal Reserve, processing credit cards is far less expensive than processing checks. Merchant Services Market Primer Focus Research ©2009 11
  12. 12. 4 Tools To simplify a complex subject, we’ve included a set of tools that can help you understand the jargon used in merchant services and a list that will help you evaluate what specific services are right for your business. 10 Signs You Need Merchant Services Glossary of Key Terms Merchant Services Market Guide Focus Research ©2009 12
  13. 13. 10 Signs You Need Merchant Services 1. Do you need to reach a wider audience? Merchant services let companies accept payment from customers located in other countries via Web-based POS solutions. 2. Do you need to increase sales in a quick and cost-effective manner? As credit cards surpass cash and checks as a preferred payment option, companies are finding that merchant services can dramatically increase sales. 3. Do you need to slash the high costs of processing checks? As mentioned above, processing credit cards is more affordable than processing checks. 4. Do you need to minimize your company’s exposure to fraud? Many merchant services providers offer safeguards such as the SSL protocol – technology that encrypts credit card information for safe and secure processing. 5. Do you need to bolster customer relations? Merchant services can help capture real-time information about customers for better sales analysis, promotion planning and loyalty programs. 6. Do you need to improve your records management practices? Merchant services’ record-keeping capabilities can help track financial transactions, cash flow and customer details. 7. Do you need to improve cash flow? Merchant services can improve cash flow by guaranteeing timely, automatic deposits to a business account. 8. Do you need to encourage consumers to use their credit cards? Many merchant services feature incentives for paying with credit cards, including gift cards and special offers. 9. Do you need fast access to funds? Cash advances provide companies with fast and easy funding as a lump sum payment in exchange for a share of future sales. 10. Do you need to accommodate on-the-spot payment processing for your customers? Mobile POS terminals let companies process payments where sales are actually occurring. Merchant Services Market Guide Focus Research ©2009 13
  14. 14. Glossary of Key Terms Merchant account holder: A company that has signed up for a merchant account and agrees to accept credit and debit card payments. Charge-backs: The result of a customer requesting his or her money back from a service or product provider. Typically accompanied by a charge-back fee to cover the costs of associated processing. Settlement time: The length of time between a credit card being charged by a company and the time it takes for that company to receive the money in its business account. Most merchant accounts have a settlement time of two to three days. Third-party processing companies may take longer. Discount rate: The fees merchants are required to pay for accepting credit and debit cards. Percentages tend to range from 2 to 10 percent of each transaction. Monthly fees: Fees charged by merchant account providers for technical support, payment gateway fees, etc. Reserves: Typically required for high-risk accounts, reserves are money that a provider withholds for each transaction as insurance. Pass-through fee: A fee charged when a particular transaction fails to meet a certain set of requirements set by a merchant services provider. Merchant Services Market Guide Focus Research ©2009 14
  15. 15. About FOCUS Our Mission Our mission is to support business professionals’ critical purchase decisions by creating and distributing the highest quality, most relevant purchase research and tool sets. Our Approach To ensure maximum insight and relevancy, Focus has designed a four factor approach to buyer-centric research. All research at Focus begins with defining the buyer factor. Categorized in our research as Buyer Types, the buyer factor identifies the buyer needs and preferences in a market that make a difference in selecting the right product and vendor. Buyer Types are studied and developed based on Focus’ interaction with thousands of buyers across a category. The buyer factor in turn shapes Focus recommendations on how buyers approach three other critical factors: 1) product requirements, 2) cost considerations and 3) vendor relationships. Buyer Feedback In addition to speaking with industry experts and other participants, a critical priority is to integrate feedback from experienced buyers. We speak with thousands of buyers each month and conduct our formal buyer surveys throughout the year. For more information on our research approach, please visit Focus. Merchant Services Market Primer Focus Research ©2009 15