Businesses know they must have a system to process credit cards. That’s a given in today’s market where credit is still king. Knowing how to properly process credit cards is a major factor when considering how payments can boost your bottom line.
Processing credit card payments come with a list of terms and fees that merchants must fully understand to ensure they are working with the right payment partners. This includes knowing how pricing works, how payment processing technology itself works, how to accept payments and what approval conditions are needed when establishing a merchant account.
Each of these elements is necessary to understand to properly operate a business in today’s fast-paced world where payment processing technology is evolving faster than most businesses can keep up with. We’ve broken down what you need to know before your business prepares to process credit cards.
Pricing Models to Understand Before Your Process Credit Cards
There are three key pricing models businesses must be aware of to properly process credit cards: Interchange plus, flat rate, and tiered. To start with the most beneficial to businesses, we’ll break down Interchange-plus pricing.
This pricing model is seen as the most transparent provided by payment processing providers. This model provides more control over the pricing structure as the rates are based on what card networks (Visa, Mastercard, Discover, American Express) your business works with. Interchange fees are set by the card networks, and the “plus” designation is what the payment processor charges for the service. These fees are typically minimal and businesses are aware of what they should expect.
A flat fee model is where the business pays a specific amount for each transaction, regardless of the transaction amount. Depending on the volume of transactions a particular business processes, this can be less favorable since you may be overpaying in fees. To that same regard, a tiered pricing model is where the fees vary by the type/amount of a purchase. This can cause some confusion and unexpected charges for merchants as it’s difficult to predict what your processing fees will be each month.
An interchange fee involves a fee paid to the issuing bank that is paid from the business’ acquiring bank and its payment processor. In order to process credit cards, interchange fees serve as a way for issuers to charge for using their credit card network. Interchange fees involve a percentage charged by the issuing bank and whatever fee the credit card network imposes, which is typically charged per transaction. These fees vary, depending on what type of deal is worked out between the business and their payment processing partners and the card networks they process through their systems. Each card network follows interchange rates, so these are fees businesses must accept in order to process credit cards.
Inside the World of Credit Card Payment Processing
The mechanisms involved to process credit cards can be complex and may appear overwhelming to some businesses. With the right payment processing partner, these challenges can be easily overcome. You just need to understand who and what is involved in a credit card transaction.
The most important aspect of knowing how to process credit cards is understanding how the backend of the equation works. Although the act of swiping, dipping or taping a credit card completes a transaction in a matter of seconds, the steps to approving that transaction are quite complex. It involves six parties: The cardholder, the merchant, the acquiring bank, the acquiring processor, the credit card network and the issuing bank.
From the start of a transaction to the completion of a processed credit card payment, the elements involved in a transaction is the authorization, authentication and the clearing and settlement of payment. Authorization involves the retailer sending the card details to the acquiring bank, which then gets passed to the credit card network and eventually the issuing bank. From there, the issuing bank verifies the transaction is authorized to be made. The transaction is then approved, or declined and the purchase (and payment) is ready for the clearing and settlement stage.
This part of the payment processing equation is crucial for a business as this is when approved transactions are then sent to the acquiring bank or payment processor to prepare for the credit card network to settle the payment. Approved transactions are passed along to the necessary issuing bank and the funds are paid from the credit card network to the acquiring bank/processor. This is when the merchant is credited for the purchase and the transaction is typically posted in the cardholder’s account.
What to Expect When You Process Credit Cards
The ability to process credit cards is done through three different types of transaction methods: swiped (or dipped or tapped), online or e-commerce, and keyed in manually at the point of sale or over the phone. Each of these methods has drastically changed over the last few years as a greater push has been made for enhanced payment security. When it comes to knowing how to process credit cards, staying up-to-date with the latest methods is one way to stay ahead of the game. Regardless of how you process credit cards, it’s important to not forget the final piece of the payment processing puzzle: The merchant account. All businesses that process credit cards must have a merchant account.
Like any relationship in the payments ecosystem, establishing a merchant account must be done carefully in order to maintain the necessary partnerships to keep funds flowing into your bank accounts without any delays or hiccups. Maintaining a merchant account also requires that businesses pay attention to a few key things: Maintaining a minimum balance threshold, avoiding unnecessary and costly chargebacks and having the latest payment security standards (PCI Compliance) to ensure your accounts are safeguarded from outside threats.
A merchant account serves as the bank account that allows business to accept credit cards. As the core piece of the credit card processing equation, the merchant account makes the transaction flow between consumers, merchants, processors, and banks possible. Merchant accounts allow for the reconciliation of funds between a business’ account, customers and the credit card issuer. A payment processor approves a payment, but the merchant account is responsible for ensuring those funds get into the bank accounts.
At the heart of all of these merchant services relationships? The right payment processing provider. Armed with a diverse set of payment equipment to meet your customer’s evolving needs to help you efficiently process credit cards, your business will be able to view payments as a critical part of your revenue building strategy.
Anna Kragie is a content contributor for Payline Data. She previously wrote for PYMNTS.com, as a Sr. Content Producer, where she focused on financial services and payments innovation, fraud and security, emerging payments, and FinTech news, research and thought-leadership content across the payments industry.