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Lauren Brockway decided to take the risk and go full-time into psychic reading. She quit her job as an outpatient assistant in a dental clinic, when to sales-and-marketing classes offered by local business groups in St. Paul, Minn., placed ads in national magazines.

As calls for her services started coming in, Brockway realized she had overlooked one essential: obtaining merchant status, or approval to accept credit cards as payment for goods and services.

She had read that home-based businesses, or any start-up businesses that want to take credit-card charges without obtaining a signature, are considered bad risks by credit-card issuers. Thus, she says, she was "really excited" when a sales representative for a company providing credit-card services told her he could get bank approval for her tarot- and psychic-readings business, River of Stars, to accept credit-card payments.

She says she was told that all she had to do was pay the sales rep a $100 application fee and $150 as the first installment on a lease for the equipment - a computer terminal and printer - that she would need to process card payments.

But after "waiting and waiting" for the promised result, Brockway eventually got bad news. The sales rep told her that the bank that would handle her credit-card charges considered her too risky and wanted a much higher application fee. It also required that she pay a "discount" rate of 9 percent on sales - meaning the bank would charge a 9 percent service fee for processing each charge rather than the usual 2 to 3 percent. When Brockway protested and demanded her money back from the sales agent, he refused.

Brockway thus became one of many entrepreneurs who enter an unfamiliar and often troubling world when they attempt to gain approval to accept credit cards from customers and clients.

The Problem For Small Firms

It used to be a very different world. Entrepreneurs seeking the privilege of accepting bank credit cards used to turn immediately to a local bank. But many banks have quit the business of merchant credit-card service in recent years, sharply narrowing that option.

From giants like Chase Manhattan to regionals like Marine Midland, based in Buffalo, N.Y., many banks have found it more advantageous to sell those operations to a handful of large, nonbank processing companies.

A small number of these companies now dominate the market for approving merchants to accept credit-card transactions. Chief among them are First Data Corp., based in Hackensack, N.J., and National Data Corp., based in Atlanta.

Why are businesses that don't sell face to face considered risky? Steven Citarella, First Data's vice president for credit policy, explains that the biggest reason is that the merchant is getting paid before delivering a product. If the merchant has financial difficulty, the goods or services may never be delivered, but the payment has already been transferred to the merchant's account.

Moreover, under federal consumer-protection laws, a buyer who has not received the goods is allowed to refuse to pay the credit-card charge.

A consumer also has up to 60 days after the mailing of the first bill for a particular purchase to inform the credit-card company that he or she is not satisfied with that purchase and wants to withhold payment.

In addition, unscrupulous merchants who do not get actual signatures on transaction statements can more easily send through bogus or duplicate charges or engage in other kinds of fraud.

Citarella says that First Data does not automatically reject home-based businesses but looks at each applicant individually. He acknowledges, however, that First Data's direct-sales representatives will turn down any mail-order type of company - including firms that sell by phone or via the Internet - that has not been in business for at least three years and cannot produce financial statements for the past two years. Entrepreneurs starting storefront businesses will generally be granted merchant status more easily.

Industry executives acknowledge that such restrictions are typical among the nonbank processors of credit-card transactions. As a result, people starting home-based, telephone, or Internet businesses are often rejected on the spot, without any inquiry into their personal credit history or any opportunity to provide a personal guarantee or collateral.

Enter The ISOs

The situation has created a niche for small, regional banks that still do their own merchant credit-card processing. These banks typically use independent sales organizations (ISOs) to aggressively seek out businesses and to deliver them to the bank as new customers.

ISOs usually advertise in the Yellow Pages and in business magazines' classified sections, often stating that they - unlike the stricter, big nonbank processing companies - can secure approval for virtually any business.

Entrepreneurs, industry insiders, and Better Business Bureau directors say that on the one hand, the ISOs and small banks they represent are providing a needed service. On the other hand, business owners need to exercise caution before signing a contract with an ISO. Hazards include:

* Losing application fees to salespeople who never deliver as promised. Brockway eventually got her money back, but not everyone who wants to back out of a deal is so lucky. She had to trace the salesman's company back to the bank that would have granted merchant status, the Bank of the Redwoods, in Santa Rosa, Calif., and then complain to the Los Angeles Better Business Bureau, which helped her get her refund.

* Being charged unexpected extra monthly fees and a percentage of each sale that is much higher than the normal 2 or 3 percent. Consider Dorrie Jones, owner of the DJ Boutique, in the Bronx, in New York City. She was surprised to find that she had a $7.50 monthly charge on her statement for a "Merchant Club" membership on top of her monthly lease fee and per-transaction charges.

* And, most common of all, being charged $1,000 or more to purchase credit-card-processing equipment, or as much as $3,000 over the term of a multiyear lease. The equipment should cost no more than $500 to $600, including setup and programming fees, according to industry experts.

Paying For The Equipment

"The biggest problem is the people who really gouge on the equipment," says Craig Millington, senior vice president of Bridgeview Bank and Trust Co., in Bridgeview, Ill, "I would say 60 percent of the "[merchant sign-up] transactions involve gross overcharging."

Millington used to be in charged in merchant services for New York City-based Chemical Bank - which no longer offers those services - and for NatWest, which recently merged with Providence, R.I.-based Fleet Bank, which also does not seek such business.

Biff Mathews, owner of the Supply Depot, a Heath, Ohio company that sells and services equipment for processing credit-card transactions, says that a basic terminal, such as the commonly used Verifone 330, has a manufacturer's suggested list price of $277 new. For a Verifone 380, which provides address verification - a necessity for mail-order businesses - the price is $327. A printer that produces a transaction receipt could add $250 to the total.

Those prices are far lower that what many merchants have been charged by ISO sales representatives, who often won't take an application for merchant status without making a deal for the equipment.

One merchant says he thought he had done well when he bargained the salesperson down from an initial price of $1,600 to $1,200. The merchant, who asked that his name not be used, sells jewelry over the World Wide Web from his home in a suburb of New York City.

Robert Wetzel, owner of Raised Images printing, a Dallas company that takes orders for its printing services by fax or phone, paid an ISO representative $150 to apply for merchant status, was turned down, and never got his money back despite a complaint to the local Better Business Bureau.

He later got approval through another company, "but I had to pay a high price - $48 a month on a four-year lease for equipment you can get for $600. But what can you do if you can't get someone to process your transactions?" He says the company refused to let him buy the equipment, insisting on a lease.

Policing The Practices

Ken Bowman, executive director of the Electronic Transactions Association, a Kansas City, Mo.-based trade association for the credit-card-transaction processing and services industry, says the problem of merchants being overcharged is "a lot better today than it used to be." The association was set up in 1990 to help cut down on overcharging and bogus fees by educating and certifying independent sales organizations and creating an industry ethics committee.

Bowman says that about 200 ISOs are certified and about 250 are registered as sellers with Visa or MasterCard International.