A shift in consumer buying habits, both at the business and personal levels, is causing new headaches among business owners.

The 2003/2004 Study of Consumer Payment Preferences conducted by the American Bankers Association and Dove Consulting shows that electronic payments have surpassed cash and checks as the preferred method of payment, and now account for 53 percent of all American purchases.

And with more and more companies making the Internet available as a payment option for their products and services, the percentage of payments made electronically can only increase. The ABA survey results showed that 36 percent of consumers expect to increase their Internet purchases within the next two years.

Recent changes in legislation are also fueling a shift in consumer buying habits.

A new federal law nicknamed "Check 21" makes important changes to the way in which commerce will be conducted. The law, which went into effect on Oct. 28, gives digital copies of checks the same validity as paper checks.

Previously, a check had to be in the hands of a bank before payment on the check could be made. Under the new law, checks can be treated like debit card payments, and the money can be withdrawn from the check-writer's bank account immediately.

Because consumers will no longer have the luxury of a "float," a period of one to three days before a check that is written clears the payer's bank account, the attractiveness of paying by check is expected to wane considerably.

Meanwhile, experts say that the rise in e-payments goes beyond just retail purchases.

Patrick O'Boyle, principal of Leadership Advocates Network, an Overland Park, Kan.-based auditing and consulting firm that specializes in non-cash payment solutions, noted that this trend is permeating all areas of business, including professional services, health care, manufacturing and distribution. O'Boyle added that any company that works with the federal government is required to accept credit card payments. "Increased credit card usage is skyrocketing every year," he said.

The need to accept various forms of electronic payment is resulting in a plethora of issues and concerns for business owners, including security and control issues, additional costs, and bookkeeping issues.

"You have to keep credit card information confidential so employees don't have access to it," said Terry O'Neil, director of the merchant business group at the Indianapolis-based firm of Katz, Sapper & Miller. "You also have to make sure it's not laying around for customers to see." O'Neil recommended that clients outsource credit card security, acquiring credit card machines that have security systems built into them.

O'Boyle suggested that the biggest security concern results from e-commerce. "You have the risk of fraudulent transactions coming through; the card being used is not the person's card who is buying from you." O'Boyle recommended several techniques for increasing e-commerce security, including validating the billing address, not shipping to certain international locations, and requiring that the person enter the code that appears on the back of the credit card.

He added that one of the biggest concerns an e-commerce business should be aware of is that when they are storing or moving credit card information, they are liable for that information. "If that information gets hacked and compromised, they can be levied extremely high fines from Visa and MasterCard, and they are at risk of having their Visa and MasterCards revoked," said O'Boyle.

In some cases, he recommended that companies become Cardholder Information Security Program-compliant.

Visa's CISP is required of all member financial institutions and certain large merchants. The program, which is optional for smaller merchants, helps minimize the threat of hacker attacks, security breaches, stolen credit card numbers and identity theft. Information about the CISP program can be found online at http://usa.visa.com/business/accepting_visa/ops_risk_management/cisp. html?ep=v_sym_cisp.

What businesses find most confusing about the process of collecting revenue electronically is the cost structure. "Profits are being eroded because of the increasing cost of these non-cash payments," said O'Boyle.

Part of the problem arises because of all of the layers of participants involved in credit card processing. There is the acquiring bank, the institution that actually funds the credit transactions. Then there is the issuing bank, the institution that provides credit cards to individuals and businesses.

In addition, there are the processors, those companies that provide the technology to make the electronic credit network happen. Finally, there are the independent sales organizations and merchant service providers who are the front-line people, the people responsible for signing up new merchant accounts. Each of these players shares in the fees that the merchant pays.

While fees for credit transactions may seem minimal and inconsequential at first glance, beneath the surface a mind-boggling fee war is being waged. "There are over 150 different categorizations of a particular transaction that can come through," said O'Boyle. The ISOs and MSPs determine the fee structure "by design, to make it confusing to the clients so they can't figure out what they're paying."

It might appear that a company is agreeing to pay a flat percent for credit transactions, but what happens in the background when a credit sale is made can be an entirely different story. Fees are adjusted based on the type of business accepting the charge, how the transaction is entered into the network (such as swiped, key-entered, over the Internet, via phone or by mail), and the type of card used for the purchase.

"The merchant pays for every perk that I get as a cardholder," explained O'Boyle. "For example, Visa miles. When I hand a merchant my business card, I'm getting miles. Visa doesn't pay for that. The merchant pays more for that business card than a personal card. It's an enormous matrix."

Another fee controversy exists over whether consumers use their bankcards as credit cards or debit cards. Merchants pay different fees depending on how the customer uses the card. And while merchants often prefer that customers choose to use the card as a debit card so that funds are immediately withdrawn from the customer's account, customers often balk at having to enter their private PIN number, and some banks charge customers a fee for using the debit service.

Last year, retailing giant Wal-Mart reached a settlement with Visa and MasterCard on behalf of retailers that requires Visa and MasterCard to clearly identify cards as check cards and to include that information on the cards' magnetic strip. This allows retailers to program swiping machines to encourage the use of the cards' debit feature.

Trying to reconcile the statements for the merchant accounts can be another nightmare. Katz, Sapper's O'Neil recommends that clients set up a system internally whereby they determine at the end of each day what charges have been processed and what the related terms and rates are. "My biggest frustration is when they forget to do it for two to three days and then have to try to straighten it out," he said.

O'Neil also suggests that companies negotiate to have credit card companies bill them monthly for the fees and write just one check to pay the amount.

Typically, fees are netted against each individual charge, so reconciling credit deposits made at the store against the deposit amounts that ultimately appear on monthly statements can seem overwhelming. However, O'Boyle is confident that it's worth the time to scrutinize the statements that summarize the charge transactions made by a company's customers, suggesting that the effort can reduce unnecessary and incorrect fees by as much as 30 percent.

Another area where businesses, particularly small businesses, lose control of costs when dealing with credit card processing is in the area of terminal options.

There are different types of terminals with accompanying levels of security, and each type comes with a different price tag. It's important to explore the different types of terminals and determine the type that's best for a business before agreeing to purchase or lease equipment. In addition, leasing equipment can easily cost twice as much or more than purchasing, so costs should be studied and analyzed carefully.

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