Credit Card Processing- All the Basics
If you’re a new business owner looking forward to accepting credit card payments, we’ll be providing you with an intimate knowledge of how you can do so, easily and securely.
First and foremost you will need a merchant account. A merchant account is a special bank account that allows businesses to accept card payments and do other credit card processing tasks. After getting an account, there will be four key players namely, the merchant, the payment processor, card associations such as Visa and the bank.
The merchant is you or your business, the payment processor is a company that creates and runs your merchant account and the bank issues credit cards to consumers. So, how does a customer make a successful payment? Below we explain the entire process.
How Credit Card Processing Works
Credit card processing is easy. After your customer makes a purchase, their card information is transmitted to the merchant account provider or credit card processor via a secure payment gateway. The payment processor then captures the transaction and sends it to the card network and after that, the transaction is sent to the bank for approval.
If your customer has sufficient funds, the transaction will be authorized and the payment will be settled in just a few seconds. Later on, your merchant account provider will deposit the funds from your sales into your merchant account. This usually occurs once per day which means you’ll receive today’s credit card revenue tomorrow.
Note that, credit card processors may also hold funds or deny transactions if they suspect fraud. In these cases, they will notify you first before taking the next step.
Credit Card Pricing Models
Not many credit card processing companies display their rates and fees on their website. However, many of them use the three main pricing models; flat rate, tiered, and interchange pricing. These pricing models are designed to facilitate payment transactions only. This means you will encounter other fees such as monthly fees and early termination fees.
Additionally, when it comes to credit card processing fees, some companies are not forthright, so ensure every fee you pay has been perfectly outlined in the contract.
Flat Rate Pricing
In flat-rate pricing, business owners pay one fee for all transactions regardless of the card their customers use. The processor will also include a per-transaction fee.
For example: You might pay a flat rate of 1.99% + $0.20 whenever your customers make a purchase. If you run a small business that accepts card-present transactions, flat rate pricing could be the best option. However, flat rates can become a bit expensive when you begin processing card-not-present transactions. So as your business grows, it may be better to switch to another pricing model that will save you money.
Additionally, when it comes to credit card processing fees, some companies are not forthright, so ensure every fee you pay has been perfectly outlined in the contract.
Tiered Pricing
The credit card processing industry introduced tiered pricing as a way of makings things simpler for merchants. There are three common tiers or groups; Qualified, Mid-Qualified, and Non-Qualified
- The Qualified group usually includes all card-present transactions
- The Mid-Qualified is for mail and telephone orders
- All card-not-present or e-commerce transactions are put in the Non-Qualified group
The idea behind this pricing model is that each group has different rates and fees. For example, in the Qualified group, you might pay a 1.25% rate + 0.35 per transaction while the Mid-Qualified group pays a 1.35% rate plus a 0.45 per transaction fee. Also, note that some merchant account providers may add other hidden groups that may increase the amount of processing fees charged.
Interchange Plus Pricing
The Interchange plus model is by far one of the best features offered by credit card processing companies. Here, you get charged different processing fees depending on the type of card used and how it was run. For every transaction, you will pay an interchange fee set by the card network and an additional markup set by your credit card processor.
For example: A swiped Visa credit card can cost 0.8% + $0.15 per transaction while a Mastercard credit card costs 0.95% + $0.10 per transaction. Note that in the Interchange plus model, the ‘markup’ or transaction fees are different for every business. So if you run a high-risk business, you might pay more than someone who has a smaller business.
Top Features of a Great Credit Card Processing Company
With so many payment processing companies being established, finding the right one for your business can a bit challenging. Luckily, there are universal qualities and industry standards that all credit card processors should meet. Below, we take a quick look at some of these qualities and further explain how you can avoid untrustworthy processors.
Transparent Contracts
When opening a merchant account, your credit card processor will present you with a contract that will detail everything required from processing fees to the hardware given and so on. At this point, many processors hide information from merchants. For instance, many processors fail to disclose that they have monthly fees. Some also don’t publicly offer interchange-plus rates so that merchants can sign up for tiered or flat-rate plans. So, to prevent any future hiccups, we urge you to read your contract very carefully and ensure everything fits your business.
Fraud Protection and credit card security
Accepting any credit card payment whether the card is present or not, is risky and you will need software that will be able to detect suspicious behavior and protect you and your customers from financial ruin. So when choosing your new credit card processing company, ask them if they provide inbuilt fraud protection and security systems. Many processors actually have automatic fraud prevention tools and they use advanced technology to detect and cancel fraudulent transactions.
PCI Compliance
Before signing up for any credit card processing service, ensure the company is PCI Compliant. Being PCI compliant means your payment processor undergoes annual assessment to ensure that they provide fair and secure services. After the assessment, a detailed report is made that describes how the processor’s security systems work and how they protect and use the data collected. The PCI compliance report will also be sent to the card associations and banks so as to ensure all members involved are aware of the processor’s activities.
Merchant Services
A good credit card processing company will have plenty of merchant services available. So look for one that has all the hardware and software you will need to process your sales. If you own a small brick-and-mortar business, you should check whether your potential processor offers credit card terminals, mobile card readers, and physical Point of Sale systems. In the case of an e-commerce store, the processor should have a secure virtual terminal that accepts credit cards through any internet-connected computer. Their virtual terminal should also be customizable in a way that will grow your business.
Reliable Customer Service
Credit card processing can become a bit complicated even for experienced business owners. You can encounter a problem at any time of the day regardless of your location. So choose a payment processor that offers reliable customer support via telephone and email. Look for processors who have a 24/7 customer support system and whose agents offer quick and efficient solutions. The processor should also have a FAQ page available on their website, just in case you encounter a minor problem.
Integrations and Features
Credit card processing involves more than just accepting credit cards. Your payment processor should also equip you with additional features that will make it easier to operate your business. Some of these integrations will allow you to link your merchant account to other applications or software such as shopping carts and bookkeeping applications. Additionally, look for a payment processor that offers accounting systems. With such a system, you’ll be able to send electronic receipts and invoices, track inventory, and schedule billings.
Final Thoughts
Having a merchant account is a wonderful way of growing your business. However, there’s no such thing as the best credit card processing system. We can only advise you to find a payment processor that will provide you with all the hardware or software your business needs at an affordable rate. If you’re a new business owner, don’t let the long applications and large monthly fees discourage you. Credit card processing is simple and growth-oriented.
FAQ
Credit card processing doesn’t come cheap. However, many payment processing companies make a point of offering rates that will fit the majority of merchants.
In credit card processing, the fees you pay are for facilitating transactions and maintaining your merchant account.
Interchange plus rates are considered the best choice for small businesses. However, flat-rate plans also have plenty of advantages.