Credit Card Processing – The Basics
Learn credit card processing basics so your business can offer customers maximum convenience and security, leading to big profits.
Accepting credit and debit cards is essential for businesses of all sizes, whether you’re selling your goods or services in a brick-and-mortar location or online (or both).
When you give your customers payment choices and provide them with safe, secure transactions, they’ll thank you with increased sales, return business and consumer loyalty. It has been shown that the ability to use a credit card for in-person or online payments increases impulse purchases and also raises the average sale’s dollar amount. If you accept credit card payments, you’ll have the edge over any competitors that do not.
However, along with the advantages of physical or online credit card payments, there are attached regulations, fees and requirements. With knowledge of industry terms, the payment process, major players and fees, you’ll save yourself time, money and aggravation over the long term.
Rates or Discount Rate
The discount rate is the main cost you will pay to process a transaction and deposit the funds into your bank account. You can often find a bundled fee from a Merchant Bank that combines their cost with that of the issuing bank, processor and credit card associations (Visa, MasterCard). This combined rate is based on a percentage of the sale plus a flat fee for each transaction. The interchange fee stays the same, but you can sometimes negotiate a lower processing fee based on the type of business you have, your sales volume and your credit history. New businesses are welcome.
Your rate per transaction also depends on how the sale was processed — in-person, online or by phone. Another consideration is the type of card that was used. You’ll usually get the lowest rate for physical transactions where the credit card is swiped. Each rate is indicated as a percentage of the sale.
Qualified Rate – when a seller accepts and processes a payment using an approved payment processing solution, with the customer presents a standard credit card, debit card of certain types of Merit cards. This is the lowest available rate and is usually what is quoted when one asks about rates.
Mid-Qualified Rate – for processed cards that do not fall into the qualified rate category. This could be a card manually keyed into a retail terminal instead of being swiped, or in the case or a Rewards or Business credit card.
Non-Qualified Rate – for the remainder of cards that do not qualify for either of the lower rates. This may be a card that is manually keyed in versus swiped, when an address is not verified, in the case of missing information or if the card is not authorized within a specified time frame (normally 48 hours). Certain Government Cards, Foreign Cards or World Cards might be charged at this rate.
If there is a charge dispute, the cardholder has up to 60 days from the statement date to plead their case. When they file a complaint with the issuing bank, the merchant is charged a chargeback fee of $20 to $35, whether they win or lose the final ruling. Because of this requirement, it is especially important to offer excellent customer service and clearly state your return policy.
Address Verification Fee
If the card isn’t physically present, the seller may have to verify the cardholder’s address to qualify for a better rate. The processor will charge a flat fee for this verification, either separately or bundled with your rate.
This fee covers the cost of data transmission between the cardholder’s bank, the merchant or acquiring bank and your bank.
Merchant Service Provider
The merchant service provider handles all communications between the merchant, card associations, processors and merchant bank. Viewed as part of the acquiring bank’s sales force, this provider opens your account with a Processing Bank and sets up a compatible Gateway or terminal.
This defines the seller’s relationship with the Merchant Bank. Some banks provide this account directly, while others use merchant account providers or Merchant Service Providers to sign up new businesses. With a merchant account, you are able to accept credit cards. The owner or business’s credit worthiness determines who gets a merchant account and at what rate.
The front-end connection to the credit card companies, a payment gateway transfers payment information from the merchant to the issuing bank for approval, and then to the processor for payment. Most banks, processors, merchant types and point-of-sale systems are supported. This is required for all online stores.
Processor or Platform
The processor (also known as the platform) transmits payment data that’s needed to authorize and complete credit card transactions. The front-end processor authorizes the card, connects to credit card companies and authorizes the network. The back-end processor receives and then forwards settlement batches to issuing banks in a scheduled time frame. A fee is charged for each transaction, typically bundled into the Transaction Fee.
The merchant bank, also called the acquirer or acquiring bank, provides you with a merchant account. They manage acceptance and payment of credit card transactions, charging the quoted rate per transaction. A portion of this is paid to the issuing bank and to the credit card company.
1. The Merchant submits a credit card transaction for authorization through a gateway or terminal to the cardholder’s bank for approval.
2. At the end of every business day, the Merchant sends all that day’s transactions, called a “Batch,” to the Processing Bank through a gateway or terminal.
3. The Processing Bank collects money from the Cardholder’s Bank and deposits the funds into the Merchant’s home bank account.
These regulations are critical when accepting customers’ credit cards. Ignoring these rules and guidelines may lead to fines or closure of your merchant account.
- Don’t run your personal credit card through your merchant account or use it to obtain cash.
- Don’t split a single transaction into smaller transactions. You could risk receiving a chargeback.
- Don’t request a credit card to guarantee a check payment.
- Verify person’s identity and card’s expiration date.
- Shorten credit card account numbers on receipts for security purposes. Each state has laws that govern what information can legally appear on a receipt.
- Do what is necessary to prevent duplicate transactions.
- Read your merchant agreement carefully. It outlines all charges, fees and regulations.
- Make it a priority to resolve customer issues.
- Use fraud screening products and services that are available for merchants.
- Close and terminate old merchant accounts properly.
- Make sure you’re using the correct account for your business. Processing Internet transactions with a “Retail” merchant account can lead to fines or the loss of your account.
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