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April 19, 2023
There is a lot that goes on behind the scenes with credit card transactions. Credit card processing is more in-depth than a simple swipe, dip, tap, or keying of a card and payment to a merchant’s business bank account.
So if you’re wondering why there are so many players in the game, fees to pay, and steps to take when it comes to accepting digital payment at your place of business, then this article will give you processing for credit cards 101.
Understanding payment processing means you will be able to differentiate between the key players, the fees, and the process that occurs every time card information is gathered. Keep reading below to find out everything you need to know when it comes to accepting cards for payment including what it is, why you need it, the key players, the process, and the fees you may encounter.
During the payment process of digital transactions, in a matter of seconds, the credit card information is authorized and authenticated by the transmission of information back and forth between a merchant’s terminal or payment gateway, the payment processor, the credit card networks like (Visa, Mastercard, Discover, American Express), and the card issuer (Wells Fargo, Chase, Capital One, Discover, American Express, Bank of America, etc).
Once a card is authorized, the funds are transferred between these financial institutions and eventually land in the merchant account.
The payment gateway is a system that channels credit card information from the physical or online terminal to the payment processor. The payment gateway can either be software programmed into your POS device or physical card reader or a web-based system for a merchant’s virtual terminal.
The acquiring bank (acquirer) is the financial institution that is a registered member of the card networks associations such as Visa and Mastercard. Merchants must obtain a merchant account with an acquiring bank to accept credit and debit card transaction deposits and settlements.
Because acquirers enable merchants’ ability to run credit and debit card transactions on their specific networks, they must also accept financial responsibility for such activities. Meaning, they and their merchants must abide by all laws, rules, and card brand regulations for card processing.
The payment processor, otherwise known as the credit card processing company, is the institution that facilitates the transportation of credit card information to and from your merchant terminal, the card issuer, the card networks, and your acquiring bank account.
Not only do payment processors facilitate your credit card processing, but they also can facilitate debit processing and ACH processing. Additionally, some payment processors can also supply physical terminals, POS systems, and gateway integration services.
Your payment processor will not only be the provider to aid your business in accepting credit cards, but they will also be your main point of contact for any questions regarding the funds in your merchant account from all your digital transactions.
In some cases, one entity can provide both functions of a processor and an acquirer (the processing of payments and the management of the settlement of funds from the cardholder’s bank to the merchant’s account).
Though the act of a credit card transaction looks like it takes less than 3 seconds, numerous wheels are turning behind the scenes to make it all happen. So now that you are familiar with the key players of credit card processing, it’s now time to divulge more about how they are all involved in the process. There are three main phases of a credit card transaction: authorization, clearing, and settlement.
Great, so now that we understand what the three steps are, let’s dissect them even further.
A transaction is initiated when a cardholder provides the merchant with their credit card information via swiping, dipping, tapping, or keying into a physical card reader, a POS system, or a virtual terminal online. Then…
And guess what. This all occurs in less than 3 seconds!
The next phase of the payment process is clearing and settlement. These steps will occur simultaneously.
The clearing is when the cardholder’s bank account will reflect the debit from the transaction and the merchant account will reflect the deposit from the same transaction. So the transaction has cleared the customer’s account and settled into the merchant’s bank. However, this step typically will occur hours after the initiation of the transaction at the point of sale.
Low to medium-risk merchants will typically have their funds settled within 24 to 48 hours of the point of sale. A high-risk merchant may experience a 5 business day settlement delay. This is for advanced protection measures put forth by the payment processor or merchant service provider.
Any credit card transaction that is successful will post to the cardholder’s monthly credit card statement from their issuing bank and the merchant’s transaction end-of-month statement from their payment processor.
So, how does the transaction go from authorization to clearing? Again, let’s dissect this portion a little further:
If you are a small or startup business and you don’t want to limit yourself and your customers to cash or checks only, then you will most definitely need a payment processor to facilitate digital transactions. Today, most merchants do accept debit and credit card transactions. And it is in your best interest to do the same if you want to be competitive within your industry.
Especially, because customers prefer paying with cards simply because of its pure convenience and even the benefits, rewards, and perks that credit cards offer for each transaction. So much so, that many consumers rarely carry cash or checks at all anymore.
However, because the card networks maintain strict relationships with their banks, merchants (like yourself) cannot process credit card transactions directly with them. You will need to establish a relationship with a payment processor to connect your transactions to the gateway to the network, to the issuer, and to your bank. Moreover, a payment processor’s direct relationship with card networks, and acquiring and issuing banks enables secure credit card processing.
It is important to know that payment processors can be tied to different merchant service providers. And they all come in different shapes, sizes, and types and offer different services, solutions, and of course payment structures. So it is important to be aware of your needs and the costs of credit card processing. Do your research to locate the best credit card processing company for your business.
Speaking of payment structures, what are credit card processing fees? Let’s take a look.
Merchants must pay credit card processing fees to accept credit card payments at the point of sale. These fees are charged by their merchant service providers, payment processors, and the card networks of those that they accept. (So if a merchant were to not accept American Express, they would not incur any fees from Amex).
The exact amount of credit card processor rates will depend on a multitude of factors, such as the industry the merchant is in, the pricing structure determined by their payment processing contract, and even the type of credit card the consumer used (card interchange fees). Typically, the credit card processing fees are based on a percentage of the total amount, plus a flat fee (in cents) per transaction.
Credit card processing rates will vary as they will include several factors, such as the:
So let’s break down what are credit card fees for businesses.
So, how much do credit cards charge businesses? Credit card processing interchange rates are fees for a certain percentage of the transaction. Each transaction, however, will have a different interchange rate based on variables such as:
These rates, however, are transparent and predetermined. You can locate the varying interchange rates on each network’s website. But be aware, these rates are subject to change twice a year. So if you’re wondering what Visa’s interchange rate for a certain rewards travel card is, or what the different Discover interchange rates are, you can visit their website for the most up-to-date information.
Interchange credit card processing rates are determined by the card networks (Visa, Mastercard, Discover, American Express), and charged by the issuing banks to the merchant’s acquiring bank for processing a transaction.
To compensate for the credit card fee rates for interchange, the merchant’s acquirer will turn it around to the merchant plus additional processor markups.
A retrieval request fee is a situation fee that would apply if a customer does not recognize a charge on their account. If they can inform their bank and ask them to look into the charge to explain what the transaction was for, this additional research comes with a fee.
But it is not charged to the cardholder who is inquiring. It is changed to the merchant who ran the transaction because this process requires the bank to request evidence from a merchant.
Furthermore, if the cardholder is still unhappy with a charge to their account after more research, they can dispute the transaction with their bank. If this is the case (even for a legitimate transaction), the merchant is charged a chargeback fee to initiate the cardholder’s request and process the chargeback.
The good news is that a merchant will, however, have an opportunity to send in a rebuttal for the chargeback to prove that the transaction was authentic.
However, Regardless if the merchant wins or loses a chargeback, they will still owe a chargeback fee for the facilitation of the entire process which can be anywhere from $15 – $25 and more if there is a second chargeback or pre-arbitration.
The card networks implement and enforce PCI compliance to any merchant who accepts credit card transactions. It is aimed at protecting and securing all cardholder data at the point of sale. If a merchant fails to become PCI compliant or maintain their compliance, they will be subject to a penalty fee for non-compliance.
If in-person merchants decide they need physical payment terminals, they have the choice to either rent or buy one. Therefore, if a merchant chooses to rent or lease, rather than buy a terminal outright upfront, they will be charged a monthly fee on their statement.
Wireless terminals are where many merchants are headed nowadays. Especially those in the restaurant industry. If this is an approach you’d like to take for your point-of-sale, there may be a set-up fee to facilitate wireless terminal connectivity ($40 – $60), an additional monthly wireless charge of $10 – $25 fee, and even a per transaction fee of 5¢ – 15¢.
Keep in mind that some of these fees may apply to your merchant account, while others may not. But we wanted to provide you with as many fees as possible that you may run into so you’re well equipped with the knowledge you need when signing a payment processing contract with your merchant service provider. So be sure to read all the fine print.
Conversely, flat-rate pricing is a bundled approach. This fee structure uses one singular charge to bundle the network interchange rate with the credit card processor’s markup fees. It does make monthly processing costs easy to predict.
However, because the rate doesn’t change regardless of the rate of interchange, merchants will typically overpay for this type of fee structure.
Lastly, we have tiered pricing, which is also a bundle of markups and interchange. This payment structure uses the interchange rate as the base price and calculates different transaction factors based on risk, to determine a tier that the transaction will fall into for its fee.
The tiers are:
Credit card transactions are far more than just the point-of-sale device, the customer’s card, and both banks. In just 3 short seconds, think about just how many players were involved and the intricacies in that seemingly easy process.
Some payment processing companies, like Electronic Cash Systems, combine merchant services such as payment processing and also supply the hardware and software needed to accept digital payments such as card readers, POS systems, and online gateways. Which caters to an all-inclusive experience for your thriving business.
Despite credit card processing costs, most merchants agree that accepting credit card transactions is essential for the prosperity of their business. Accepting credit cards helps improve merchant sales and cash flow. And with the right payment processor, it can offer a convenient and secure payment alternative for customers.
I hope this article on payment processing 101 has given you a better understanding of credit card processing and all that is involved for you as a merchant.
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