In the Internet era, processing credit card transactions with landline-based hardware terminals may no longer make sense to the bottom line. These old-fashioned devices can be costly and time consuming and, given the ubiquity of high-speed Internet access, there are other options for small and mid-size businesses these days. Virtual terminal -- software that runs on PCs or point of sale kiosks and emulates a terminal device -- process transactions online and can streamline your reconciliation -- providing you take the necessary security precautions.

Virtual terminals verify credit card transactions through Internet gateway services by allowing merchants to enter a customer's credit card information onto a computer, either keying in the data or through a portable reader that relies on "swipe" technology. Processing transactions over the Internet can cut precious seconds from each credit card transaction, increasing employee productivity and reducing telecommunications fees.

Landline-based terminals can still make sense for businesses that perform few monthly credit card transactions. Credit card terminals, which range from $150 to more than $400 for a wireless unit, often result in extra charges per transaction in addition to telecommunications costs for dialing in, which can increase the costs compared to Internet-based services. At the same time, keyed-in transactions are sometimes charged a higher percentage to process than swiped cards, so business owners need to weigh the different factors before deciding which credit-card processing technology to choose.

Internet-era transaction processing

Using Internet-based credit card processing requires a combination of software and services that, while more complex to implement, offer greater reporting capabilities than terminal hardware.

Businesses that take payments in person use card readers that send credit card data to virtual terminal software. This software connects with Internet gateway services that authorize payment by connecting to credit institutions. 

Virtual terminal applications submit credit card information to transaction processing software such as ICVerify, Verifone's PCCharge, and TPI Software's Smart Payments run on both PCs and point of sale (POS) workstations. These applications offer up-to-the minute reporting capabilities to track recent transactions. They can also create payment data files in industry standard database, spreadsheet and text file formats that can be exported to accounting software to save time by eliminating re-keying in data.

These applications verify payments through real time Internet gateway services that authorize the transaction. To make it even more confusing, some applications combine the virtual terminal, credit processing, and Internet gateway functions.

The downside is that these workstations need to be designed to store all credit data on encrypted servers because workstations can be compromised if stolen or hacked into, according to Julie Bruber, the president and founder of transaction processing company Bank Credit Services Worldwide. Several states now have laws requiring companies to report data breaches to all of their customers. Companies should only purchase POS or PC products that are security certified as Payment Card Industry (PCI) and Cardholder Information Security Program (CISP) if they want to accept Visa and Mastercard payments.

Software accounting programs from vendors such as Intuit and Cougar Mountain Software eliminate the batch processing of transactions. These programs complete a credit card transaction from within the application itself by connecting to credit processing services. They verify the transaction and create the ledger entry simultaneously, so companies can track performance on a continual basis instead of weekly or monthly reconciliation, according to Cougar Mountain chief operating officer Cary Welsh. His company's credit card processing software sells for $439 and has the added benefit of being able to process charge backs for returned items.

To swipe or not to swipe

Companies that accept both phone and in person orders should continue using card readers because of the difference in the discount rate charged (its based on the amount of the purchase, not really per transaction) by credit card companies. Card-swiped transactions are charged at a lower rate because they are seen as less susceptible to fraud. The discount rate can range from less than two percent of the transaction for card-swiped transactions to as high as five percent for keyed-in authorizations. Keying in all transactions instead of using card readers can cost hundreds or even thousands of dollars per month, depending on the volume and amount of transactions.

While virtual terminals are often more cost-effective, small business owners must calculate their expected volume versus the upfront hardware cost and monthly service fees to determine the best option.