Credit card processing is quite a complex process. It only takes a few seconds to complete but involves multiple companies and steps from start to finish. In a nutshell, it works as follows: information is passed from the customer (cardholder) through the processing company of your business and the respective credit card network, and then to their bank account. When the cardholder’s bank accepts or declines the transaction, the information flows in reverse to the merchant, ideally letting them know the status of the payment.
Companies Involved in Credit Card Processing
The most important role of the credit card processing cycle is determining whether the cardholder’s bank account has the necessary funds to complete a transaction. Transactions involving EMV cards usually take an average of 15 seconds to complete.
The first step in card-processing occurs at the consumer level. A cardholder swipes their card or hands over their card/payment information to the merchant. The processing and settlement of the transaction typically involves four parties: the acquiring or merchant bank, the card processor, the card networks or card association, and the issuing or consumer bank.
Merchant Bank (Acquiring Bank)
Merchants can handle credit card transactions in one of two ways. They can either accept the payment physically in a card-present transaction, or use an online gateway to facilitate card-not-present transactions. Card-present transactions occur at a storefront, usually using a card reader to facilitate the payment. Card-not-present transactions use an online gateway to collect the payment information from the customer.
The merchant bank is the bank in which a merchant or business holds its funds. Also known as the acquiring bank, a merchant bank can serve as a card processor, though many small businesses are increasingly turning to third party non-bank processors like PayPal, QuickBooks GoPayment, and Square.
Many acquiring banks outfit the merchants with card readers and the necessary equipment to accept card payments. These banks are also responsible for depositing funds into the merchant account once a transaction goes through successfully.
However, the role of acquiring banks has been shrinking in the recent years, since more business owners are choosing to use third party independent sale organizations.
Examples of acquiring banks are Chase, Citi, and Wells Fargo.
Credit Card Processor
Card processors can be best understood as the messengers that facilitate communication between the cardholder’s bank and the merchant’s bank. The processor collects the information received from the merchant and routes the data across other channels as needed. The card processor is responsible for not only routing this data securely, but also facilitating communication between the parties involved. Nonetheless, their most important role is routing the payment information to the card network.
The card processors also make sure that every transaction adheres to the rules as outlined by the Payment Card Industry Data Security Standard (PCI DSS). They also collect the preset fees from the merchant for their service. The fees are either fixed, or some form of a percentage markup added to the interchange fees, when they pass onto the merchant at a cost.
Examples of credit card processors are Stripe, Authorize.net, and Square.
Card Networks and Associations
Most credit cards operate in any one of the major card networks, such as MasterCard, Visa, American Express, and Discover. The card networks ideally work with the card processors to route the data collected between the issuing bank and the merchant. Once the respective cardholder’s network receives the payment information from the processor, they pass it on to their bank.
The networks are responsible for setting the assessment and interchange fees that are charged per transaction. Although the card networks set these fees, they usually don’t collect all of them. The largest cost involved in card processing, the interchange fees, are usually passed on to the issuing bank. The card networks normally collect the nominal assessment fees, which are only a fraction of the interchange fees.
Issuing Bank (Cardholder’s Bank)
This is the bank where the customer banks. It issued them the credit card they used at your store. The key function of the issuing bank is to determine whether the cardholder has enough funds in their account to complete a transaction, and to release the fund for the transaction to settle. The consumer bank might also conduct extra security measures to establish whether the transaction is legitimate.
Based on the kind of card that the issuing bank has given the customer (rewards, premium, etc.) the interchange fees on the cards as charged by the card networks might be higher or lower. In general, the more the rewards the card gives the customer, the more expensive the interchange fees.
Finding the Right Credit Card Company
If you’re planning to accept debit and credit card payments, whether in person or online, you will have to choose between the many credit-card processing companies in the market today. Keep in mind that you’ll also have to pay some upfront and ongoing fees. However, accepting card payment in your business could boost your sales and help expand your customer base.
Choosing a credit card processor is not easy. But just like making any other major financial decision, it’s wise to do some due diligence and carefully compare the available options. The following are some of the major considerations when choosing the right card processing company for your business.
Identify your payment processing needs
The first thing you want to do is make sure that the company provides the services that your business needs. Today, there’s a myriad of credit-card processing options, with different solutions meant for different needs. So it’s important to consider things like – is your business a storefront or an e-commerce website, a small or large business, or something in between?
Look for a company whose services, merchant accounts, and solutions are best suited to your niche or industry. Whether you’re a pharmacy, grocery store, restaurant, non-profit, or e-commerce startup, your credit card processor should fulfill your business needs.
Credit card processor companies can be broadly categorized into:
- All-inclusive companies for multi-platform businesses:these usually coordinate simultaneous card-present payments at the storefronts through custom POS terminals, as well as card-not-present transactions online, by mail order, or over the phone. Unsurprisingly, this service is quite complex and typically includes 24/7 phone support. The fees and rates vary widely.
- Online purchases only companies:these are perfect for businesses that operate entirely from their online store. Some of these companies have the capacity to customize the virtual checkout experience, analyze customer data, and more. Plus, they provide systems that are better optimized for online and mobile shopping.
- Companies that serve mobile or low-volume businesses:these are more suitable for businesses that operate at variable locations. The companies offer fully optimized card payments across a wide range of mobile devices. In addition, they allow for in-person POS card purchases through portable card readers that can attach to most tablets and smartphones.
Most credit card processing companies can handle a brick-and-mortar store with an online presence. In case you have other specialized needs, such as phone orders, mobile services, mail orders, or a combination of such options, be sure to talk to a sales rep and discuss your business needs. Some payment processors can provide you with month-to-month options with no cancellation charges.
How long will it take to setup the account?
In your due diligence, try to find out how long the payment processing company usually takes to set up an account and install the required equipment, so that you can plan accordingly. In case it seems complicated, find out if the company can provide you and your employees some support, whether in person or over the phone.
Does the company provide new payment technologies?
If your business serves a lot of tech-savvy customers, this might be a major consideration for you. You may want to work with a payment processor who provides contactless payments or NFC technology services, so that you can accept payments from digital wallets such as Android Pay, Apple Pay, or Samsung Pay. This way, your customers can make purchases by simply using their mobile phones and devices.
How much does the service cost?
It’s important to understand how much you will be paying for the processing services as well as what you can expect in terms of the services across the term of your contract. Many of the processing companies share their fees and rates on their websites. Since most companies categorize their pricing into a number of tiers, it might be difficult to get an accurate, all-inclusive quote upfront.
As you talk to the sales rep, be sure to inquire about their initial setup fees. It’s also wise to get a list of the recurring fees before you sign up so that you avoid any surprise charges in the future.
- Interchange fees: these are the fees charged for each processed transaction. The interchange fee is paid to the card-issuing bank by the payment processor via pass-through pricing. The fees range from 2% to 3% of the transaction, though the rate you pay will depend on a number of factors such as the type of card, size of each transaction, and the type of transaction (card-present or card-not-present). Larger and fewer transactions as well as card-present transactions generally attract low interchange fees.
- Monthly statement fees:your credit card processor might have a monthly charge (about $10) for statement fees to cover the cost of mailing you a monthly statement.
- Software:several of the smaller payment processors provide free apps to help you get started. However, companies that work with high-volume credit card processing companies might incur an additional cost to purchase the payment processing software. Payment processing software also requires regular updates for added security, which may or may not be free.
- Application and Equipment fees: you may be charged for applying for the credit card processing service. Some payment processors offer free equipment like mobile card readers or free terminals, while others will charge you to set up the equipment. Nonetheless, the provided equipment might not be enough for your needs. Sometimes, the equipment might have to be upgraded, and this usually involves a fee for acquiring the new equipment. A good example is the advent of EMV credit cards.
- PCI Compliance fees:merchants are required to meet the standards and guidelines of the PCI (Payment Card Industry). The guidelines are designed to keep the industry secure. If a merchant doesn’t meet these requirements, they may be fined. There are processors who charge a PCI-compliance fee – be sure to find out if it’s applicable in your situation.
- Chargeback fees:merchants will have to pay this extra charge to the processors every time a customer cancels a card transaction and asks for a refund.
- Early termination fee (ETF): this is the fee charged when you cancel your contract early, and one that you definitely need to avoid.
- Flat fees and interest per transaction:for every card transaction, the merchant pays a standard flat rate per sale. Moreover, a fixed percentage of the total value of the sale will go out to the credit card company.
- Monthly maintenance: many card-processing companies will require a minimum monthly fee to cover account management, customer support, technical support, and the general operating costs for the systems in place. If you exceed or fail to meet this minimum amount, the company will charge you to meet the minimum. For instance, if the minimum fee is $30 and your total fees for the month are $25, you’ll be charged $5 to meet the minimum amount.
What you pay for credit card processing will vary from business to business, and it’s quite difficult to forecast the costs accurately, even with comparison sites. It’s recommended that you shop for credit card processing providers like you would for a product like insurance. Collect as many quotes as possible from different providers and compare them.
Understand that there’s more to Processing than Cost
The quality of service is another major consideration when choosing a credit card processor. It’s important that you understand the kind of features you will get through your provider. One processor might be willing to provide you with a detailed reporting interface where you can log in, while another forces you to export reporting details into Excel. Note such differences and choose accordingly. You might discover that saving a few dollars a month is costing you extra hours to track or maintain your database due to their outdated technology.
Overall, choosing the right credit card processing company requires a lot of time and effort. However, these efforts will surely pay off when they result in finding a processor that meets every processing need of your business, charges competitive fees, and complements their service with great customer support. Before you enter into an agreement with any company, make sure that you’ve read the contract carefully and that you’ve understood all of its terms and conditions.