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Understanding Child Care Credit Card Processing
by Sam Stortz
07/23/10
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Accepting credit card payments makes sense for most childcare centers and school-age programs. Why? Parents love the convenience and perks, such as airline mileage, that they get when paying by credit card. And, your center benefits from quicker, more efficient fund collection that electronic payments make possible. However, childcare centers face a confusing array of payment processing solutions, and risk ending up with the wrong technology or paying more than they should. In this article, we demystify electronic payment technology and provide some useful guidance on avoiding pitfalls.

What types of payments?
The first place to start is to identify what types of payments you want to process. Here are some possibilities to consider:

Will parents initiate the payments each time or will they authorize the fees to be paid automatically on a recurring basis?
Do you want parents to have the ability to process the transaction themselves (for instance on a web site) or will your staff process the payment?
Will you have a physical card to swipe?
Will the payments simply be for the same amount each time or will the amount vary due to extra charges and fee adjustments?
Do you also want to be able to process payments as direct transfers from a parent's bank account?

Why do these questions matter? They're critical, because the type of payments strongly influences the processing technology best suited to your needs, as well as your processing costs. For example, you certainly wouldn't want to have to key every parent's credit card information and payment amount into a credit card terminal each month to process their childcare fees. Not only would this be a lot of unnecessary effort, it is also prone to errors and even presents security risks, since you would need to store the credit card data somewhere. The first factors to consider for your particular situation are how often payments can be made, and who makes them.


Pre-authorized Recurring vs. Parent-initiated One-Time Payments

Since almost all childcare and school-age programs collect fees on a regular cycle, parents typically make payments on a recurring basis. The more appropriate distinction is whether you want to encourage parents to authorize the automatic processing of the payment when it's due, or rely on parents to initiate the payments each time.

Preauthorized fee collection eliminates challenges with late payments and reduces the work for both parents and center administrators, and we've written a separate whitepaper called The Six Secrets to No-Hassle Fee Collection that describes this topic in depth.

Pre-authorization is becoming more common as people gain experience and confidence with the security of automatic payment processing - especially among today's generation of parents who grew up with ATMs and other electronic payment technology.

Nevertheless, despite the many advantages of pre-authorized recurring payment processing, many centers still prefer to give their parents the freedom to make their payments individually each time they are due. In this case, the question becomes whether the transaction will be processed by the center's staff or on more of a self-serve basis directly by the parent.

Staff-Processed vs. Self-Initiated Transactions

Regardless of whether the payment is going to be staff processed or done on a self-service basis the key challenges are the same:

Collecting the correct payment amount
Reducing the risk of human error
Ensuring data security
Maximizing administrative efficiency

Collecting the correct payment amount - There are a variety of techniques you can use to ensure that electronic payments are made for the correct amount. Generally the simplest approach is to use a physical or electronic invoice or statement to communicate the charges and amount due. If you want to allow parents to process the payment on a self-service basis, electronic statements offer the advantage of making it possible to include
a link to an online payment form. The best solutions will use "smart-link" technology to minimize data a parent must enter when making a payment. For staff-processed transactions, integration with your accounts receivable system makes it easy to ensure the payments are processed for the full balance due.

Reducing the risk of human error - The risk of data entry error increases substantially with one-time transactions. You can reduce the impact of human error and significantly improve the likelihood of a successfully processed payment with the right technology. The key is to use real- time validation and authorization of data whenever possible. For credit cards this means that you want the credit card number and expiration date checked immediately when it is entered. The amount of the transaction can also be authorized (approved) ensuring that amount is available on the card. In this way any data entry error or need for a different credit card can be identified and corrected immediately.

This technique is advantageous regardless of whether the data is being entered by staff or parents. Real- time authorization for bank account debits is not available for e-check (ACH) transactions unless they are done via debit cards, which typically incur higher fees (see Pitfalls below) but it is still important to use technology that at least validates the bank routing number entered.

Of course one of the best ways to reduce data entry error is to eliminate it! Since these one-time payments are almost always being made by the same people, using the same credit card and bank accounts, the optimal solution is to save the account information so it doesn't need to be entered each time. The challenge is doing this in a way that is secure and protects this sensitive data.

Ensuring data security - The protection of credit card information is a paramount concern for the credit card industry and there are many initiatives with numerous acronyms (CISP, PCI) that continue to impose tighter rules on the handling and storage of credit card data. The bottom line is that, if possible, you do not want to store credit card information and if you do keep it, it must be secured. In computer terms, this means both password protected and encrypted, with similar protection of paper records that include credit card information.

Currently, many of the most onerous rules apply only to organizations that process large volumes of transactions, but there is a clear trend toward continuing to tighten controls throughout the credit card world. As a result, the current practices of many childcare centers, such as keeping lists of credit cards to process each month, will need to change. Even worse are web forms that collect credit card information on a non-secure server (note: you can quickly tell if the server is secure by looking to see if the web site address starts with https:, not just http:), or forms that simply generate an email that lists the credit card information.

You simply don't want to put parents' information at risk or expose your center to fines or litigation.

Maximizing administrative efficiency
The most critical aspect of administrative efficiency is eliminating the need for any double entry of payment data. For both staff-processed or parent- processed transactions that means that processed payments (including the relevant approval data) should be easily downloaded or automatically recorded onto the parents' account ledger in your center management or accounting system. Solutions that require you to separately record the payment not only mean more work, but also increase the potential of human error. Integrated solutions also make it a snap to reconcile your processing statements.

Here are a few other features to look for that simplify payment administration:

Payment receipting via printed or emailed receipt
Ability to review completed (as well as non-completed) payment transactions
Ability to issue any necessary credits/refunds
Online tool for reporting and analysis of transactions

Getting a Merchant Account

Credit card processors label anyone who processes transactions a merchant and hence your processing account is called a Merchant Account. Merchant accounts are financial accounts through which payments are made. Since the financial institutions that issue merchant accounts take some financial risk if the cardholder disputes a transaction, applying for a merchant account typically involves providing information necessary for a credit review.

Some solutions for processing credit cards do not require you to have your own merchant account. This may seem appealing since it can eliminate the time and effort to establish your own account and, in some cases, also eliminates application and monthly fees associated with having a merchant account. These processors accomplish this by using a merchant account that they have established to process your transactions. However, unless you expect to process very few transactions each month, such arrangements expose you to lots of potential problems, including delays in receiving your funds and parent confusion when the name associated with the transaction on their credit card bill doesn't match your center's name. See the "Pitfalls" list below for more problems with third-party accounts.

Understanding Merchant Account Fees
There are many different elements to the fees you will be charged and centers often find it difficult to directly compare various accounts since there is no simple and consistent way such fees are presented. To help you understand, let's first separate fees that are one-time from fees that are ongoing.

One-Time Fees - Fees are frequently charged for getting established with a merchant account. They may be called Application Fees, Setup Fees, Gateway Setup Fees, etc., but they are all essentially the cost to get started. There may also be one-time costs for software or equipment needed to process transactions. Sometimes the cost of software or equipment will be an ongoing monthly expense if it is provided as a web-hosted solution or if equipment is leased.

Monthly Account Fee - Almost all merchant accounts will have some type of monthly fee. It may be called a statement fee, account fee, reports fee, etc., but regardless, it is simply an ongoing cost of having the account available. Some accounts have multiple monthly charges. These fees typically range from $10-30/month. Other accounts impose a monthly minimum fee as an alternative (or in some cases in addition) to the monthly fees.

Transaction Fees & Discount Rate - Typically, there are two components to the cost of processing each transaction - a fixed per-item fee (usually between $0.20 and $0.50) and a fee that is a percentage of the transaction amount, called a Discount Rate. The discount rate can range substantially (usually between 2-4%) based on the type of credit card and the method of processing used. For example, if the discount rate offered is 3%, and you receive a payment of $100 you will be charged $3 as the processing fee. Most of this money goes to the card issuing company such as Visa, MasterCard, and Amex (they call this an "Interchange" fee).

The challenge with comparing and understanding these fees is that most merchant statements do not present the fees as simply as this. For instance, often the discount rate is broken into components such as a rate that represents the Interchange rate and another line item that represents the additional charge from the processor (the company that facilitates and sends the transactions to the various credit card companies). In this case, you need to add both fees together to find the true cost.

Further complicating matters are the many different rates that can apply to a transaction depending on the type of card used. This is not just if it is Visa, MasterCard, or Discover, but also if it is a Rewards card, Corporate card, Debit card, etc. Other factors affecting this fee include how the transaction is being processed (swiped, keyed in), and even if it passes certain fraud prevention tests such as "Does the address associated with the transaction match the billing address of the credit card?"

According to the credit cards companies, the countless different rates reflect the different levels of associated "risk." For instance, they feel there is a greater risk to transactions done without the physical card being swiped. This penalizes phone, mail and Internet transactions. Transactions that are not done face-to-face fall into a category called "card not present" or "mail order telephone order (MOTO)" transactions. MOTO processing
rates can also vary substantially based on the type of card and your organization's processing volume - but it will typically be to 1% higher than a physically swiped transaction.

The card types and processing methods will often affect the fees you are charged by dictating if the transaction is treated as qualifying or non- qualifying (for the best rate) transaction. Non-qualifying transactions are charged a higher or additional percentage, and not all processors use the same standards for qualification of transactions.


Pitfalls to Avoid

Third Party Processing are solutions that process transactions on your center's behalf through their merchant account. Potential problems with this type of processing are:

1. Delayed receipt of funds - Unlike when you have your own merchant account, where funds collected are automatically deposited immediately, "agent" processors typically mail payments only once or twice a month.

2. Risk of non-payment - Since the third-party is holding your money, your center is also exposed to loss if the third-party is not financially strong.

3. Chargeback risk - Parents are far more likely to dispute charges on their credit card statements that do not clearly identify the source of the charge. Having your own merchant account allows your center name & phone number to be displayed on the parent's statement. Charges processed via a third-party's merchant account will typically have the third-party's name (e.g. Fees-R-Us, CollectNow. Com, etc), which are often not relevant to the cardholder. Often, they will simply call their credit card company and dispute the charge. This will, at a minimum, result in extra charges (called
Chargeback fees), as well as extra work for you and your clients.

Debit cards - Banks have done a great job promoting the use of debit cards and they continue to grow as a method of payment. The problem for the center being paid is that they can be a relatively expensive way to collect fees directly from a person's bank account. Debit cards are processed through the credit card networks, and like credit cards, the fee is a percentage of the amount being charged. Although the discount rates for debit cards can be somewhat lower, they are often processed at the same rate as credit cards. So for example, the fees for a $100 tuition charge will be $2-3.

If available, the better alternative is to use what are often called "eCheck" transactions, which are processed through the Federal Reserve ACH (automated clearing house). These transactions normally incur a flat per transaction fee (typically less than $.50).
These savings can become very substantial on larger transactions or with high volumes of transactions.

Final Thoughts

We hope you now have a better understanding of the various tools and technologies that can be used by your center to process credit card and other electronic transactions efficiently. Here is a quick summary of the most important points:

Processing technology needed is a function of the type of The transactions to be processed (recurring vs. one-time, and parent- initiated vs. staff-entered).

Unless your center will be processing very few electronic payments, it is worthwhile to use a solution that provides for your own Merchant Account.

Transaction processing costs can be hard to compare and decipher. When comparing alternatives consider all costs - even non-direct ones such as staff time to enter data.

Don't ignore other types of electronic payment processing such as ACH transactions, which can complement credit cards and often lower your processing costs.

Simplicity, security, and administrative efficiency of your online process can often be most critical for a successful solution.

With a better understanding of the subtleties of transaction processing you are well on your way to ensuring that your center has the right solution in place. The benefits of convenient and efficient processing of electronic payments can truly be significant for both parents and your center.


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