Credit card processing is generally seen as a necessary unethical thing in business. The estimated share of card payments by number increased by just over one-third of a percentage, reaching 74.25 percent in 2020. This rush of card and digital payment methods continues to rule the market. Accordingly, businesses need to accept change consumer habits for payment processing.
For business owners, it’s a mystery to understand. Oftentimes, the fees are confusing and the terms get complicated looking at the nature of your business. Not to mention, calling your processor for help majorly leaves you with more questions than answers. If this has been your experience with payments in general, you’re not the one who has suffered this problem, there is a list of people who are facing this problem in their daily routine.
Many small business owners admit their skepticism about their financial statements. This is a continuous and yet understandable occurrence. After all, your expertise lies in your industry and market, not in dealing with and understanding payments. Despite this, you should understand the basics of your business. Costumer behaviour continues to shift from a cash-dominated society to only 10% of consumers solely relying on cash to make purchases in the US. But before you ask how you can accept credit card payments, it’s essential to understand the plus and minus of credit card processing.
This blog will provide you with some clarity in your vision. We’re going to explore the basics: exactly what you should know about payment processing.
Defining Credit Card Processing?
Credit card processing is the cycle that allows your customers to pay your business via card payments. It’s the sequence that happens when your customer uses their debit or credit card until you receive that money in your business bank account, right after the process is done, this hardly takes a few seconds to cover the process.
Parties Involved In ItThis whole process may take a fraction of seconds but nobody knows about the behind the scenes parties involved in it :
1. Merchant : The first and most compulsory party involved in your business. You offer a product or service to your clients in exchange for money. In this, you’re considered a “merchant.”
- The Cardholder: On the other hand, is your customer. They carry a credit card or debit card to make the payment against the purchase. In this context, your customer is a “cardholder.”
- Credit Card Processor Or Payment Processor: A credit card processor or payment processor is the party that tracks the transactions by smoothly o transferring data between you and your customer. They are the party where you sign the contract to set processing fees and agreements.
- The Card Issuer: Your customer’s credit or debit card connects to a bank account. This could be a large bank like Bank of America or a small bank like a credit union. The bank that houses the account is known as the “card issuer” because they issued the credit or debit card to your customer.
- The Acquirer (Merchant’s Bank): A bank holds your business bank account. Again, this could be a large bank like Wells Fargo or a small bank like a credit union. The bank that holds your account is the “acquiring bank.” An easy way to remember this is to think that it holds the funds at the end of the transaction.
- Your Customer’s Card’s Brand (The Network/Association): The network, also known as the card brand, is the brand of your customer’s credit or debit card. Besides being hosted by a bank, Visa, MasterCard, Discover, or American Express sponsor your customer’s card.
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Working on Credit Card Processing?
Credit card processing is more complicated than it seems. To the cashier or customer, it appears the card is either approved or declined: at the end. But it is far more complex than it seems. Now after exploring who is involved in processing a transaction, let’s talk about the process and discuss the roles of each party plays.
Credit Card Processing for Small Business in 7 Steps
Step 1: The customer starts a transaction
The cardholder (the customer) swipes their card to pay for a transaction at the store/online etc against the purchase he/she has made and starts the credit card payment process.
Step 2: The merchant accepts the information
The merchant accepts and gathers the cardholder’s payment information in person, online, or over the phone.
Step 3: The information is given
The merchant either manually or automatically sends the funds directly to the payment processor via the processing equipment: online through a payment gateway, or keyed in through a virtual terminal.
Step 4: The information is checked
The network sends the transaction information to the customer’s bank. The issuer then verifies the bank’s records match the information provided and the cardholder has enough money in their account to proceed. The processor checks for any doubt of fraud and runs a data security scan.
Step 5: The processor is notified
The issuer notifies the processor, who then sends an “approved” message if everything is okay and verified from its end. If the information is incomplete, inaccurate, or the available balance is inefficient against the purchase, the processor declares it as a “declined” message. This entire process, to this point, takes a fraction of seconds. Receiving an approval message only completes the half transaction. It’s enough to let the customer take their purchase, but the merchant hasn’t been paid yet. The customer sees an authorization on their bank statement. This process freezes the funds so they cannot be used.
Step 6: The batch is closed
To get the money out of the customer’s bank account and into the merchant’s, the merchant must automatically or manually close the batch or group of transactions. A merchant can close batches manually to include any number of transactions, or set them to close automatically in a given period. Particularly, 24 hours is the common closing cycle for batches.
Step 7: The money moves
After the merchant has closed the batch, they indicate to the processor that the transactions in the given batch are true, complete, and accurate. That processor then routes the money over the network between the customer’s bank account (the issuing bank) and the merchant’s (the acquiring bank). Hence, the transaction is complete.
Knowing More About Credit Card Processing Fees and Costs
Now you are aware of the parties and how the process works in processing a credit card transaction. Now, let’s talk about fees. We will go through some of the more common fees given below:
Your monthly bill from your processor has these major things.
Transaction fees: Those fees correspond to individual transactions and make up the bulk of your total fees. These include any type of fixed percentage of the flat amount charged on the transaction. Examples include an authorization fee or a fixed percentage mark-up rate for the transaction.
Lapse fees: These fees do not tie to individual transactions. For example, you may see monthly fees for things like PCI compliance, PCI non-compliance, account on file fees, statement fees, batch fees, etc.
One-time fees: One-time fees include setup fees, early termination fees, and chargeback or retrieval fees. A specific or unusual event activates these fees.
Payment Processors use many different pricing models to collect fees quarterly or monthly. As a result, your pricing structure and the complete cost you pay will vary. This depends on your business model, the deep-rooted riskiness of your industry, the credit card acceptance method, and more.
1. Interchange Plus: Depending on the type of payment method used, the charge can differ. The interchange-plus pricing structure is the clearest, which makes it the most confusing. Each party charges its fees for its involvement in the transaction. This pricing structure passes those wholesale fees to you, which can include any number of the 300+ possible interchange rates and many association fees. It adds on a small fixed percentage mark-up over cost that compensates your payment processor.
2. Flat Rate: This structure is a vague price pattern but easiest to understand. It combines all the rates and fees you would pay into one easy-to-understand and the predictable flat percentage each month. Flat rate pricing is the structure you’ll probably be most comfortable with as it is the structure used by Stripe, Square, or PayPal.
3. Tiered/(E)RR: The tiered pricing structure is quite similar to the flat rate pricing structure, but a part of one rate, there are a few. Your processor bundles the 300+ possible interchange rates into three ‘buckets’ and charges you based on the transactions that you fall into each bucket.
Types of Credit Card Processing Terminals
What are your equipment options for processing credit card transactions? You connect to your payment processor through referred credit card readers, so it’s an important percentage.
Your choice of equipment will depend on a few things:
- What your payment processor carry
- Your needs as a business owner. Do you need to take your equipment to your customer, or do they come to you for registering?
- The cost of the solution and future mobility, therefore, how much the solution will cost you in the long run)
Point of Sale software systems is the gold standard in restaurants and retail stores. They handle credit card payment processing as a small thing in their function. They can also help in managing inventory and coordinate between the front and behind the scene of the house. Not to mention, they’re amazing in collecting customer information for long-term retention. They come in various forms, so make sure to dig into your research on a POS system before purchasing. This will ensure it has all the features you need to run and scale your business in the market.
EMV is a credit or debit card with a fixed security chip. This technology has replaced the magnetic stripe on the back of cards as a more secured alternative for the customer and the merchants as well. Moreover, to decrease storing direct information on your device, EMV tokenizes (or encrypts) customers’ card data. Make sure to employ the best people at the time of storing credit card information.
An EMV Terminal is a traditional countertop terminal that processes payments using that chip.
This term is often confused with a virtual terminal because they’re used correspondently, but there are many key differences between virtual terminals and payment gateways. A payment gateway provider attaches the technology that captures and sends encrypted transaction data from the customer to the acquirer to an online checkout page on a website. It clarifies that the payment done is not fraudulent and can even handle recurring billing, chargeback reduction, and PCI compliance.
Virtual terminals are credit card payment processing software that runs entirely online. Just because of this, you can access them by logging into a secure portal from any internet-connected device. A virtual terminal allows you to quickly process single (as well as recurring ) transactions directly through your portal. You are the one in control of entering the card data. This is most common with mail orders.
Online Shopping Carts
If you are planning to commence an e-Commerce business, you’ll need an online shopping cart to make it flow. An online shopping cart utilizes a virtual terminal on the backend to create a front-end store your customers can use to purchase items. Because of this, it allows your customers to make purchases without your direct involvement.
Choosing Correct Credit Card Processor
You should now be familiar with how to accept credit card payments for your business for its benefits. Now, let’s talk about how to find the correct processor for your business. Choosing from too many options of credit card processing companies is one of the most important and tough choices you’ll make in expanding your business.
While cost is very important, it’s equally important to consider a credit card processing company. Consider who picks up the phone when you call with an issue and is compatible with your business and equipment needs. And most importantly, focusing on keeping your business transactions safe and secure.
Your credit card processor is your merchant services provider. Accordingly, merchant service is a term that encloses a wide variety of business financial services. The most common of which is credit card processing.
It may also, depends on your business, which includes things like ACH transactions or electronic checks. Not mentioning physical check processing, gift card, loyalty programs, etc.
Besides, with the merchant services offered by a credit card processor, there are more services they might offer. These include things like:
- Merchant cash advance or money loans
- Payroll management
- Stock management
- Accounting and billing services
- Customer loyalty programs
- Fraud preventive tools
Many payment processors offer integrations with some other service providers. Further, this ensures you have the most encyclopedic solutions. If there’s a service you need that your credit card processor doesn’t offer you, cross-check with them for any relevant integrations that they have available.
PCI Compliance is faith fullness to a set of comprehensive security standards set by the PCI Security Standards Council. The main motive is to decrease fraud and related costs for businesses around the globe utilizing credit card processing. Failing to meet these standards may come with unreasonable costs, so this is an important one we should keep in mind.
Fraud and Risk Protection
Accepting credit cards comes with a set of risks that you need to consider, as it is its nature. For example, a transaction completed fraudulently at your store without your review is a risk. One that may result in your loss of both the merchandise/service and the money offered for it. This is due to cardholders having protection from fraud.
The true cardholder can dispute transactions with their bank and issue a chargeback, which will eventually hinder your day-to-day routine. Indeed, this process is essentially a mini court case surrounding the transaction. Your business practices and the industry you operate in affect your rate of chargebacks. Industries or businesses that are considered as high-risk businesses like adult businesses, CBD businesses, etc. are more affected by chargebacks and fraud.
Having a merchant service provider who is looking out for your best interest is key. It will also help to erase your risks of fraud and chargebacks while doing business. It will save you time and money in the long run with good credit card processing.
Responsive Customer Support
No solution is perfect. Sometimes the power goes out, your terminal malfunctions or a point-of-sale system unexpectedly goes offline due to server issues. Finding a payment processor that has responsive customer support when you need them will make all the difference, and will offer a helping hand out of it.
Closing Thoughts On Credit Card Processing by Payment Guru
Accepting credit cards is necessary for your business. Therefore, we hope you feel confident enough to sort through credit card processing companies to find the right partner for your business and understand it a bit better after reading through this complete blog to credit card processing. Contact our team at Payment Guru to discuss your business requirement. We just might give the right solution for your business’ credit card payment processing needs.