You
are interested in accepting payments via credit cards for running a business
(small or big) smoothly. However, if you are going to implement it for the
first time, it can be a bewildering experience.
This
is because you have no idea where to start, whom to approach, how it works, or
how much it costs. To gain this knowledge, obtaining a better understanding of
credit card processing and its providers is essential. This is exactly the aim
of this guide.
What is Credit Card Processing?
Credit
card processing refers to a set of operations occurring to accept payments via a
credit card, which can be online, over the phone, or in person.
Accepting
a credit card payment may seem quite simple: A customer gives the card, a small
machine or processor processes it, and the money is credited to your business account
instantly or within two days.
However,
underneath, a lot of tasks are going on, right from the time the card is swiped
until the time the money gets deposited. In between, a couple of key players
are involved, each handling a critical task in the series of events. So, let's
explore these players!
Key Players in Credit Card Processing
· A
payment processor that is a company responsible for processing the card
transactions and connecting all of the aforementioned players to make card
payments possible; often known as merchant
processing companies
· A
cardholder who gets a credit card from an issuing bank and uses it for purchase
· A
merchant refers to a business that sells products and/or services and accepts
card payments
· A
merchant's bank, also known as the acquiring bank that sets and maintains the merchant
account to accept the sale funds and deposit the same into the account
· An
issuing bank, also known as the cardholder bank, as a bank or any other
financial institution that issues cards to the customers, is associated with a
card association, pays the acquiring bank, and gets the paid amount back from
the cardholder as per the credit card agreement.
· Card
association that refers to the governing bodies establishing interchange rates
and other rules between the two banks above
· A
payment gateway as a virtual counterpart of a physical Point of Sale (PoS)
system to encrypt and send transaction details to the payment processor, offers
relevant tools to e-commerce portals, and obtain authorization from banks to
transmit money to the merchant.
Roles Key Players in Play in the Payment Process
Credit
card processing occurs in three phases, namely, authorization, settlement, and
funding.
In
the authorization phase:
1.
The cardholder provides the card to
the merchant via a secure method (swipe, insert, or enter card number online). The
request may initiate from a PoS system or a credit card terminal in a physical
shop or a website gateway in a virtual one.
2.
The merchant sends this request to the
payment processor for authorization
3.
The processor sends the card details
such as CVV and expiry date to the suitable card association, from where it
goes to the cardholder's bank.
4.
The cardholder's bank grants or
declines the request. The latter can happen in case of insufficient funds or
the account is no longer there.
5.
The cardholder's bank sends the final status
to the card association, from where it goes to the acquiring bank and then to
the merchant.
These
steps take just a couple of seconds.
In
the settlement and funding phases:
1.
The merchant sends sets of authorized
requests to the processor.
2.
The processor sends the details to the
card association, which then informs the debit amount to the cardholder's bank.
3.
The cardholder's bank debits the
cardholder's account and levies a charge for the amount to be paid.
4.
The cardholder's bank transfers the
money to the acquiring bank after deducing the interchange fee.
5.
The acquiring bank deposits the money into
the merchant account.
These
steps nowadays occur overnight to ensure quick transfers.
How Much Credit Card Processing Cost?
The
payment processors charge a fee for every payment accepted via a credit card.
There are a few types
of fees a processor may charge as per the
pricing model in use, which is as follows:
· Processing:
This is a transaction fee, also known as the markup fee. It is charged by both
the gateway and the credit card processor, but it is negotiable.
· Interchange:
This is a processing fee, also known as the wholesale fee. It is charged by the
card association and the cardholder's bank. It is a fixed amount to pay towards
processing, payment approval risk, and bad debt or fraud risk. It is a percentage
of the order amount plus a transaction fee computed by the card association.
This fee is calculated as per the type of credit card used for making the
payment. For example, the interchange fee on a rewards card is higher than a
usual one.
· Assessment
or Service: This fee is charged by the card association and
is also fixed. It is usually a small percentage and is influenced by the risk
level and transaction volume.
What Are Processor Pricing Models?
Processors
implement four pricing models, which are as follows:
· Flat
Rate: A simple fixed fee for all card transactions
irrespective of the type of card
· Interchange
Plus: A percentage of the transaction along with a
fixed amount per transaction, separating the interchange and per-transaction
fee (commonly used, affordable, and transparent)
· Subscription:
A flat monthly service fee plus a per-transaction fee
Conclusion
While it is not essential to know about credit card processing inside out for running any business, it helps tap its full potential for fulfilling your business requirements.