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
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.