Basics of Credit Card Processing
Setting up your business to accept credit cards is not as complicated as it seems. It can be as simple as finding the best merchant service provider charging you the lowest cost to process your customer's credit card payments.
Knowing the basics of the credit card processing system will help you to determine which merchant service is best for your business.
The Process Defined
There are four participants involved in the credit card transaction process. One is the Merchant, which is the party that receives the credit card payment (you). The second is the Merchant’s bank, which is referred to as the acquiring bank. The third is the issuing bank that issued the card to the customer. The fourth is the customer, which is the person using his/her credit card to make a purchase.
These four parties work together to complete each transaction, and usually without thought or wrinkle.
In the simplest terms, a credit card purchase is a short-term loan between the issuing bank and the customer, with the merchant and the acquiring bank in between.
If everything works out the way it is supposed to, the customer pays the bank within 30 days, or the purchase amount is added to the customer’s credit card balance. The customer pays a predetermined interest rate on any balance owed to the issuing bank.
However, if you dig into the technical aspects of a credit card transaction, the acquiring bank makes a short-term loan to a merchant in the amount of the purchase. This loan covers the amount owned to the issuing by the customer until all parties settle the purchase.
Processing fees are charged to the merchant by both the issuing bank and the acquiring bank.
In the end, the amount of money that ends up in the merchant’s bank account is slightly less than the amount charged to the customer (the purchase amount minus the both bank’s transaction fees).
Fees Paid by the Merchant Explained
There are two main “transaction” fees paid by the Merchant. One is the issuing bank’s charge to the Merchant, which is referred to as an “Interchange Fee”. The second is the acquiring bank’s charge to the Merchant, which is referred to as the “Discount Rate”.
There can be addition fees depending upon the type of business and type of transactions they make.
Both the interchange fees and the discount fees are expressed as percentages of the transaction, although a small fixed amount may be associated with each transaction.
The type of business will affect the interchange fee rate. The issuing bank will charge certain types of businesses more due to a higher risk of “chargebacks” made by customers. A chargeback is an action taken by a customer who successfully disputes a credit card transaction.
Chargebacks and Risk = Increased Fees
Some businesses are known to encounter a higher volume of chargebacks, and therefore typically pay higher rates.
Conversely, banks charge some types of businesses less because there are fewer chargebacks. Therefore, low-risk businesses pay lower bank rates - especially when the cardholder is physically present for the transaction.
Typically, if the cardholder swipes or inserts their card and then signs for the purchase, there is less risk of chargebacks. This is why convenient stores, restaurants, and low volume brick and mortar businesses receive more favorable rates.
The riskiest credit card transactions are completed over the phone or Internet, and businesses that take payments in these forms pay higher rates.
Factors That Increase Credit Card Processing Cost
- Card Present: Businesses typically pay lower rates because less risk is involved
- Card Not Present: Businesses generally pay more due to increasing risk, and other fees such as online Gateway fees
- Average Ticket Size: The amount of the purchase has an impact on the credit card processing fees. The greater the average ticket size, the higher the average processing costs
- Debit vs. Credit Card Charges: Debit card interchange fees are less than credit because there are fewer risks and no loan between the customer and the bank
- What is a “Low-Risk” Merchant?
- Monthly volume of $20,000 or less
- Average ticket size is $50 or less
- Secure processing - reduce credit card fraud
- Businesses in a low-risk industry
- Businesses in the US
Types of Credit Card Transactions - Four Ways to Accept Credit Card Payments
- In Person Transaction (Card Present)
- Remote Transaction (Card Not Present)
- Point of Sale Transaction
- Mobile Transaction
- Important Factors When Considering Merchant Services
- Transaction/swipe rates • Equipment, setup and other costs
- Ease of setup and use • Contracts and service terms • Types of processing offered
- Types of payments accepted
- Funding and processing time
- EMV capability
- Merchant services
- Additional features and benefits
- Customization options
- Third-party integrations
- Reporting and analytics
- Service limitations
- Customer service
As a business owner, you must first figure what credit card processing system is best for you and your customer. Whether that involves a hardwired POS terminal or a Mobile Payment system, Card Present or Card Not Present (remote payment), via the Internet or phone, etc.
Once you know the best payment system for your business, it’s time to find the best merchant services company to set up your merchant account. Call Finical, Inc. today and get your FREE equipment and price rate guarantee - (888) 707-7258.
Why Finical, Inc.?
In today’s digital marketplace it’s important to know your systems and processes are keeping up with the times. As you have learned, there is a host of ways your customers can pay for your product or service. At Finical, Inc. we make sure your equipment is state-of-the-art and compliant with all of today’s new regulations.
We offer the latest NFC readers for Apple Pay and Google Wallet, and give you updated EMV compliant terminals to reduce fraud and liability - covering all the ways your customers can pay.
Trusted by over 100,000 happy merchants, Finical, Inc. makes the process of opening a merchant account easy and affordable. Finical, Inc.'s merchant services allow small businesses to accept all major credit, debit and debt cards and protect against fraud, all while offering the best rates and lowest fees in the country.
Receive a free EMV-compliant credit card reader when you sign up with Finical, Inc. today! Call (888) 707-7258 and compare your current merchant service fees with ours - we guarantee to match or beat your rate. We look forward to serving you.