What is Credit Card Processing?
Merchant Services or Credit card processing ensures consumers a smooth and swift checkout by handling the intricacies of credit and debit card payments. According to Spendesk’s online journal (Nov 2019), it is estimated that there are 1.06 billion credit cards in use in the United States with an average of Americans having four credit cards per person. When a business incorporates a credit card processor to handle payments, it boosts customer convenience and accessibility (in-store or online) for making a purchase.
Merchant Services providers are meant to determine whether the consumer has the necessary funds to approve their purchase (online or offline). Despite taking a few short seconds to complete, credit card processing is a complex process that requires many important steps. The sale will be credited to the merchant’s account almost instantly; however, it can take up to three business days before the money reaches their account.
Here are the steps and parties needed to fulfill a transaction:
The consumer initiates the purchase by swiping, tapping or dipping their card or handing over their payment information to the merchant.
The merchant accepts and collects the payment information. This can be done in one of two ways:
- In-store: Payment is accepted physically with a credit card reader.
- Online: Merchant utilizes an online gateway to collect the payment from the consumer.
The merchant or credit card processor collects the customer’s payment details and routes that data across to the other stages, primarily to the card network. The processor facilitates communication between the different parties.
4. Card Network
Essentially, the card network collects the payment information from the processor and passes it on the consumer’s bank. The customer’s card will operate one of the major credit card networks – the most common are Visa and MasterCard.
5. Consumer Bank
Once the consumer’s bank receives the payment request, they will verify whether the consumer has the appropriate funds or credit to complete the purchase. Additional security measures are taken to ensure that the purchase is legitimate and shows no signs of fraudulent activity. When the consumer’s funds are authorized to be released, they will send a message back through the networks and credit card processor as completion of the transaction. A bank will deny a transaction for any of the following reasons:
- Insufficient funds in the account.
- The credit limit has been maxed.
- The bank suspects that the purchase has been made by a non-authorized user.
The message is then sent back through the same channels to the merchant who must inform the consumer via the credit card reader if their payment has been “Approved” or “Declined”. If the transaction is cleared, then the merchant must hand over the service or goods that the consumer is expecting in return for the payment.
Credit Card Processing Fees
Every credit card processor utilizes a different pricing structure and approach for calculating fees and rates which makes it slightly harder to compare the brands. Below are the main fee and rate types to look out for:
Also known as a “wholesale” or “merchant discount rate”, this rate is non-negotiable and the biggest fee that merchants will pay. It is usually a percentage of each transaction plus a flat charge (e.g., 2% + $0.10 per transaction). Sometimes unusual, foreign transactions incur higher interchange fees.
Very small flat rate percentage that applies to the total monthly volume of sales on a specific type of card – i.e. Visa, MasterCard, or American Express – e.g., 0.1% of sales up to 1,000 sales.
Applies to land-based businesses and it is the cost of leasing a physical equipment terminal to the store.
This is the “retail” rate that the payment provider charges to cover the cost of credit card processing. It includes the wholesale interchange cost such as card brands, and fees for front-end authorization, back-end settlement, PCI, and acquiring the bank. The processor’s profit margin is added to the wholesale rate.
Payment Gateway Fees
Applies to online retailers and it is the cost of the merchant’s online point of sale (POS) software – virtual payment terminal.
Monthly Minimum Fees
Merchants are required to pay a monthly fee if they do not make a certain minimum amount of transactions per month.
One major aspect to consider when choosing a Credit Card Processor (or Merchant Service Provider “MSP”) is the merchant’s type of business. Every business is placed into a merchant category and given a merchant category code (MCC) and if a business has a high-risk MMC, they will be charged a higher fee than low-risk businesses. Businesses can be labeled as ‘high-risk’ if they cover any of the following:
- Products sold have a high return rate.
- Require a large amount of capital to get started.
- Considered to be in a high turnover industry.
Some high-risk MCC includes:
- Online gambling or casinos
- Online dating services
- Adult entertainment
- Debt collection
- Magazine or other subscription-based businesses
*Certain terms and conditions apply. Full terms can be found on Leaders Website.