Understanding Credit Card Processing
The process of accepting a credit or debit card at you business may feel as though it should be as simple as swiping the credit card and the money ending up directly in your bank account. However the actual process is much more complicated with a large number of active players involved.
The main participants in the process are the Merchant, the Customer, the Processor, the Card Payment Brand, and the Card Issuer. The side of the transaction that most people see is between the Merchant and Customer. In this section of the process, the merchant enters an amount into the credit card processing equipment(this may be as simple as a mobile device, an online terminal, or as complicated as an integrated point of sales system – depending on the needs to the individual merchant).
Once the individual using the credit card processing equipment enters the amount, depending on the type of equipment and the processing environment, the information is sent directly to the processor or is held to be batched at a later time. The information may beheld because the individual is using a credit card terminal without internet access, or in the case of a restaurant the information may be held until so that the tip amount can be entered in at a later time.
Once the processor has the information it then forwards it on to the Card Payment Brand (Visa/Mastercard/American Express/etc), who then relays the information on to the Card Issuer (the bank which provided the credit card to the customer). The issuer will then either approve or decline the transaction, and this information is relayed back through the same chain to the merchant.
The credit card will either be approved, declined, or referred. If the transaction is declined, the credit card will not be able to complete the current purchase. If the transaction is referred, it means that the Card Issuer is looking for additional information from the merchant about the card holder before they will approved the transaction. This is done to reduce fraud, and often the cardholder will be asked to speak on the phone to verify that they are in fact using the card.
While many business owners think that the transaction has completed, the process has only begun. The next phase of the process is known as Settlement, and during this process the additional players which played a role in the authorization of the credit card, collect fees for their involvement. This is where the complexity of the process takes over and where merchant who sign with poor processors are harmed.
The initial charge that is removed from the purchase amount before the funds arrive in the merchants bank account, is known as interchange. It is a set number that is determined by 2 factors – the type of card processed, and how the card is processed. While fairly simple at a high level there are over 700 different types of credit cards, and various ways a card can be processed which leads to a very large number of interchange charges that a business can see each month. How the card is processed is normally based on the business environment – online businesses will process online, while traditional brick and mortar will process in person. However whether the card is swiped, or manually entered in significantly changes the potential for fraud an as a result the interchange fees charged.
While the type of interchange is determine by two main factors, whether the fee is higher or lower is based on three main thoughts. The main question involves the likelihood that the transaction is fraudulent. The chance that a credit card is being used fraudulently in a brick and mortar store that the customer routinely shops in, is far less likely that an online store. As a result the interchange fees for a credit card swiped in at the point of sale is less than those for online purchases. Each credit card has 3 rates associated with it qualified, mid-qualified, and non-qualified; qualified transactions are considered the least likely to be fraudulent and have the lowest rate while non-qualified are the most likely and have the highest cost. The more information a merchant sends with the transaction the more likely the card will be considered qualified. The second major factor is whether the card is a rewards or corporate card – these cards have higher fees associated with them because the additional fee money is what goes towards the rewards and promotions associated with them.
Once interchange has been accessed, the processor adds an additional service charge to the transaction. While interchange rates are set by the Card Payment Brands, each processor is able to add their own fees on top of this and this is specifically where Merchants can lose money. Processors also set the limits for what constitutes a qualified, mid-qualified, and non-qualified transaction; which means if you work with a Processor without your best interests at heart you could find that nearly all of your transactions are non-qualified and you are paying too much – the Processor that sets up their customers like this also very likely have added excessive fees on top of the interchange rate.
Once all of the parties involved in the transaction have taken their piece, the final part of the process is where you the business owner receive your money. This is known as “Funding”, while the above process can take less than a second to go through, typically merchants receive the money for the transaction in their bank account 1 to 2 days after the transaction is completed. This delay exists primarily to reduce fraud and allow a cardholder who may not have been aware of the purchase to potentially see the charge and call their credit card company to investigate.
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