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So you want to accept credit cards online?

Online merchants looking to sign up to accept credit cards should keep in mind the old adage: If it looks too good to be true, it probably is.

"The Internet is giving new life to a lot of old scams," said Craig Millington, president of the Electronic Transactions Association, an international association formed in 1990 to help develop operating and ethics standards for ISOs. At the time, ISOs had a particularly dubious reputation.

"Merchants really need to scrutinize every merchant account contract and shop the deals they are offered," says John La Peer of EDR Payment Services "Otherwise they have no idea of what is a good rate. Merchants need to be educated about what to look for in a merchant account contract, and how to choose credit card processing equipment."

While many ISOs are trustworthy and fair, the term is still often associated with crooked companies.

Three common tricks: Hiding fees from merchants, disappearing after taking a large number of application fees, and grossly overcharging for credit card processing equipment, either software, card readers, or other add-ons.

Read Between the Lines

Illegitimate ISOs will sometimes lure merchants in with discount rates of 1.5 percent or lower and then charge exorbitant per-transaction fees and monthly maintenance fees, which are buried in the fine print of the contract.

While 1.5 percent is very competitive for a retail merchant account where the card is present and can be swiped on credit card processing equipment, that’s an impossible rate for an internet-only merchant. MasterCard's standard interchange rate charged to Internet merchants is 1.85 percent of the sale plus 10 cents. Visa's interchange rate is 1.80 percent of the sale plus 10 cents.

This means ISOs must pay this amount to the card associations for each qualified transaction. A 1.5 percent discount rate is far below the 2 percent to 3 percent rate most acquirers charge qualified Internet merchants. Therefore, you should be skeptical if you're offered discount rates under 2 percent.

"The reason some ISOs can get away with price gouging is that there is no usury law when it comes to discount fees," La Peer said, during out interview at EDR Payment Services office. "It benefits merchants to learn as much as they can about rates before signing a contract."

Loosely worded contracts can disguise clauses that give an ISO the right to raise discounts fees without notice or to impose new fees. Confusing wording can allow the ISO to extend the length of the contract at will, indefinitely locking the merchant into a money-losing situation.

If the ISO is unwilling to give clear answers to questions about rates or clauses in the contract or about the total cost for credit card processing equipment, that's a red flag.

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