The Ultimate Guide to Credit Card Processing: What Every Merchant Needs to Know
So you’re navigating the world of credit cards and thinking about setting up shop for your small business. You’ve definitely come to the right place!
To some, accepting credit cards as a small business owner can seem pricey, complicated, and fraught with hidden fees. Nevertheless, it’s evident that the vast majority of consumers — 80% according to industry data — prefer to pay for goods and services with either credit or debit cards.
Factoring in those statistics or not, processing credit card payments should be a routine part of your business. This guide will help to simplify the concept of credit card processing for small businesses, no matter what industry you’re in.
What is credit card processing?
Credit card processing can be explained as being the series of activities needed to process and finalize payments made with a credit card in person, online, over the phone, or by mail.
Who is involved in the process?
There are a number of parties involved that facilitate the action of completing a transaction.
Merchant — The business that is selling the product or service and accepting the payment from the customer.
Customer — The cardholder, or the person that is making the purchase.
Credit card processor — Also known as a “payment processor,” this entity manages the transaction process by acting as a middle-man between the merchant, the credit card network and the cardholder’s bank. A processor can authorize transactions and helps facilitate the transfer of funds. It ensures that all transactions comply with industry standards.
Credit card network — Us mere mortals simply know this as the “brand of credit card.” These include American Express, Visa, Mastercard, or Discover. These are not banks; they are entities that determine interchange rates, compliance standards and arbitrate between acquiring and issuing banks.
Payment gateway — This refers to the technology that connects a merchant to the payment processor. A payment gateway works with transactions where a card is both present and not present (in-store vs e-commerce). The gateway handles the payment details of the transaction and routes them to a payment processor or the merchant bank and determines whether a transaction is approved or declined.That information is then sent to the merchant.
Issuing bank — The cardholder’s bank. This bank supplies the customer with the credit card they use to make purchases. It’s main function is to determine whether the cardholder’s account has the funds to complete a transaction and releases those funds to the acquiring bank.
Acquiring bank — The merchant’s bank. This bank holds the merchant’s funds and receives money from customer transactions. It is able to provide the merchant with card readers and equipment to accept card payments. The acquiring bank can also serve as a credit card processor.
How does credit card processing work?
The path of information when a transaction happens is quite basic. First, the cardholder’s transactional details are given to the merchant’s processing company. At the same time, that transactional information is given to the credit card networks, as well as the cardholder’s bank.
When the bank approves or denies the transaction, the information follows the same route in reverse – From the cardholder’s bank, to the credit card networks and onto the merchant’s processing company to process the transaction, and the POS system that the transaction went through – or not.
Here’s the process broken down in a series of steps:
Step 1. At the point of sale, the cardholder’s payment and transactional information is given to the merchant
Step 2. The merchant takes the payment information, either in person at a POS terminal, online or via phone.
Step 3. The transactional information is sent to the credit card processor, who then forwards it to the credit card network to confirm the security protocols.
Step 4. The card network approves or denies the transaction, then sends the information to the customer’s bank.
Step 5. The customer’s bank is responsible for verifying that the purchase is legitimate and that the cardholder has sufficient funds/credit to complete the transaction. Then, it approves or declines the transaction, and communicates that decision through the payment processor. Common reasons for a declined transaction include insufficient funds, credit limit reached or an unauthorized purchase.
Step 6. If and when the transaction satisfies the cardholder’s bank verification process, the funds are released from the issuing bank and are ready to be deposited to the merchant account. Here begins the settlement process.
Step 7. At the point of sale, a notification travels back from the cardholder’s bank to the card reader or virtual terminal. This results in a message that tells the merchant whether the transaction has been “approved” or “declined.”
Step 8. The last step in the process is settlement, which can often take a few days depending on the card network used in the transaction. The settlement is the official transfer of the transaction amount from the consumer bank to the merchant bank, minus any applicable processing fees.
How much does credit card processing cost?
Now we’ve got the fundamentals out of the way, it’s time to consider the financial implications of credit card processing. Credit card processors usually charge fees for every credit card payment transaction that takes place in your business. Depending on who that processor is, you may be charged additional fees according to whichever pricing model the processor uses.
Credit card processing fees
You know that accepting credit cards almost always comes at a cost to you, the business owner, but what determines this fee?
There are two main types of transaction fees. Wholesale transaction fees and markup transaction fees.
Sometimes known as ‘interchange fees’, these are charged by both the issuing bank, as well as the credit card network.
These are charged by the credit card processor and the payment gateway, and can usually be negotiated as they’re nothing more that a markup to make a profit.
Here are a few other common types of credit card processing fees:
Also known as the “wholesale fee.” This non-negotiable fee is often the largest portion of the transaction and is collected by the issuing bank. It’s made up of a flat rate plus a percentage of the sale (US average 1.7%). The actual rate a merchant will pay can vary greatly. Interchange rates on travel, business, and premium or rewards cards are higher.
This is another non-negotiable fee, but this time it’s the card network that charges it. This goes to the card network (Visa, MasterCard, Amex, etc.) and ranges from 0.105% to 0.13% for Discover, Visa, and MasterCard. American Express is known for having significantly higher rates than other cards which is why some businesses completely forgo accepting AmEx altogether.
Each payment processor charges their own specific fees. This is the processor’s markup and usually translates to pure profit for the payment processor. These fees will vary depending on the pricing plan of the processor.
In addition to the transaction fees, other fees associated with merchant accounts include:
- Monthly minimums
- Setup costs
- Credit card reader fees
- Cancellation fees
- Statement fees
- Customer support fees
- Chargeback fees
- Batch fees
- Annual fee
- And much more!
It goes without saying that a prudent business owner casts a keen eye over their payment processing statement every month. Merchant services providers make huge profits from merchants who aren’t aware of exactly what they’re paying and why.
Remaining conservative and taking all the fees into consideration, an estimated average maximum cost to accept credit cards per transaction will land you somewhere between 1.5% to 2.9% for swiped cards, and 3.5% for keyed-in transactions.
Well, when setting up a merchant account, ensure you do adequate research on credit card processing companies and identify one with fair fees. Next, consider raising your prices (or even setting your prices if you’re a new company) to off-set the additional credit card fees.
Payment Processor Pricing Models
Credit card processors offer a number of different pricing models. The following are the most likely ones to come across:
Flat-rate — A flat-rate (sometimes referred to as blended pricing) model charges onevfixed fee for all credit and debit card transactions regardless of the card used for payment. Keep in mind online or telephone transactions often carry a different flat rate. This model can also include a per-transaction amount on top of the rate.
Tiered — A tiered model charges a fee based on the card network used in the transaction, the associated risk of the transaction, and the overall transaction volume of the business. This model is considered to be the most confusing to merchants. An important factor to remember is that these “tiers” are arbitrary and determined by the provider.
Interchange plus — Interchange plus pricing is known as the most transparent form of pricing for merchants looking to accept credit cards. This pricing model consists of two components: the interchange fee, which is set by the card networks and a markup set by the credit card processor.. Interchange-plus pricing are generally associated with fair and balanced pricing schemes.
Subscription — A subscription model charges a flat monthly service fee, along with a small per-transaction fee. This is the pricing model that we implement at Payment Depot. Rather than taking a cut out of your sales or marking up interchange fees, we simply bill you a flat monthly fee, and you get access to interchange (aka wholesale) rates, and avoid paying more than you have to.
Think of us at the “Costco of payment processing!”
How to find the best credit card processing company for your small business
Mirror, mirror, on the wall, who is the best credit card processor of them all?
Well, the truth is that it’s up to you to find the processor best suited for your needs. A credit card processor is just as important as the bank you choose to handle your funds. Keep in mind that there are other important factors other than just fees. Over and above, the ideal provider should be a trustworthy and reliable processor that puts your mind at ease. There are also many independent online reviews that outline the best or cheapest credit card processing companies.
The ball is in your court as to who you choose to cooperate for your business, however we recommend to keep these factors in mind:
- The overall fees associated with the credit card processor
- The processor’s fraud protection and security
- The merchant services offered by company
- The breadth and availability of customer support
- Any additional services the processor might offer
Credit card processing technology and equipment
When navigating this new world of credit card processing it makes sense to get your head around what kind of tech solutions you might be dealing with.
Online invoicing — Online invoicing software are tools that can help your business generate a bill for products or services that you have provided to customers. It beats the archaic and time-consuming Excel spreadsheet.
EMV smart terminal — An EMV terminal is the new generation of card reader. When your business is welcoming customers in a store swiping (or tapping) their cards, this could be an ideal solution for you.
Mobile payment solutions — There’s no need to explain the power of mobile payment gateways. Whether it’s for a dedicated online store or allowing diners to split bills, implementing a mobile payment solution can make it easier for your customers to pay.
Online shopping cart — Online shopping carts are powered by payment gateways and are really critical for any online business.
Integrated point-of-sale system — Point-of-sale systems are solutions used by merchants (usually retail stores and restaurants) to run their businesses. Modern POS systems run on computers as well as mobile devices like tablets and smartphones.
API — Payment APIs are APIs (Application Programming Interfaces) designed for managing payments. In many instances, they can help protect merchants from fraud and information breaches. Examples of common APIs include Stripe, Noodlio, Square and PayPal.
Security and Compliance
To protect yourself and your customers from credit card fraud, choose a processor with robust data security capabilities. Also, see to it that the processor is compliant with Payment Card Industry Data Security Standard (PCI-DSS) and other relevant recommendations.
- PCI compliance
- EMV compliance
- Additional card information, i.e, security codes or the customer’s zip code
- A track record of implementing evolving tech, i.e, biometrics, and end-to-end encryption
- Insurance to cover worst-case scenarios
Tips for How to Lower Your Credit Card Processing Costs
Have you ever wondered why there are so many payment solutions and merchant services to choose from that are willing to assist you in accepting credit cards? The obvious reason is because they’re making a great deal of money. Each time someone swipes their credit card and it’s processed, there are several key companies out there that each take their cut.
While these charges and service fees may seem like very small percentages per transaction, over time they significantly add up. Sadly, most of the fees are virtually always passed down to the merchant and presents an inevitable expense for them. While accepting credit cards is vital to the business of most merchants, it is indeed a privilege that comes at a considerable price.
Luckily, there are many ways to obtain lower fees for credit card processing and ultimately reduce your costs for doing business as well. Look at the following methods to learn how to get your credit card processing rates reduced:
Expand Your Business
Truthfully, one of the best ways for lowering rates regarding credit card processing is to simply be a larger company. Paying out 10 cents on each transaction (plus a low monthly subscription fee), like with Payment Depot’s Best Value plan, is extremely cheap, but it can seem much bigger than it is when you’re only processing a few dozen transactions a day. Boost your daily reach to hundreds of transactions a day and suddenly those bargain rates look even lower than they already are!
Monitor Your Monthly Statements
As a merchant, chances are you won’t understand your first monthly statement when you first see it, and you may in fact discover some additional charges you weren’t fully aware of. Many merchant services providers like to sneak up on their clients with hidden charges and unexpected fees, so always familiarize yourself with the plan you’ve chosen and make sure your monthly statement reflects it. If you see any hidden fees showing up, it’s probably time to choose a more honest provider that promises to never charge you hidden fees (like Payment Depot), which brings us to…
Whether you’re simply shopping for another option or tired of your existing credit card processing company, switching proviers could be the best way to lower your fees. Unfortunately, there are many merchants who will tolerate poor service and higher fees just because looking for a better solution can take a considerable amount of time and because they’re already used to their present interface and program. However, for those merchants who are fed up with their existing service, there are practical available options. Consider switching to Payment Depot as your new online merchant account provider. Payment Depot offers competitive prices without sacrificing customer service or security. It also offers a free 90 day trial, charges no hidden fees, and also charges no cancellation fee if you decide not to stick with them.
Switching from one service to another may seem like a challenge, but it can be done quickly and easily, and – best of all – it could easily yield hundreds of dollars in savings each month for your business.
Need help navigating the ins and outs of credit card processing?
We hope you learned a thing or two about credit card processing and trust that you’re now fully-armed to search for the perfect credit card processing company for your business.
If you need additional assistance, don’t hesitate to get in touch with us. Send us your merchant statement or proposal and we’ll happily evaluate it to determine which payment processor or merchant services provider is right for you.
Quick FAQs about Credit Card Processing
Q: What is credit card processing and how does it work?
Credit card processing refers to the series of activities needed to process and finalize payments made with a credit card in person, online, over the phone, or by mail. It involves various parties such as the merchant, customer, credit card processor, credit card network, payment gateway, issuing bank, and acquiring bank. The process starts with the cardholder’s transactional details being given to the merchant’s processing company, followed by verification and approval or denial from the bank, and ends with the settlement process.
Q: Who are the key parties involved in credit card processing?
The key parties involved in credit card processing include the merchant (the business selling the product or service), the customer (the cardholder making the purchase), the credit card processor (the entity managing the transaction process), the credit card network (brands like American Express, Visa, Mastercard, or Discover), the payment gateway (the technology connecting the merchant to the payment processor), the issuing bank (the cardholder’s bank), and the acquiring bank (the merchant’s bank).
Q: What are the different types of transaction fees in credit card processing?
The two main types of transaction fees are wholesale transaction fees and markup transaction fees. Wholesale transaction fees, also known as ‘interchange fees’, are charged by both the issuing bank and the credit card network. Markup transaction fees are charged by the credit card processor and the payment gateway. These fees can usually be negotiated as they are a markup to make a profit.
Q: How can small businesses reduce their credit card processing fees?
Small businesses can reduce their credit card processing fees by being a larger company, understanding their monthly statement and monitoring for any hidden fees, and considering switching providers to get lower fees and better service. It’s important to do adequate research on credit card processing companies and identify one with fair fees.
Q: What are some recommended credit card processors for small businesses?
There are many credit card processors available for small businesses, and the best one depends on the specific needs of the business. Some popular choices include Stax, Square, Helcim, Stripe, PayPal, and Shopify. Factors to consider when choosing a processor include the overall fees associated with the credit card processor, the processor’s fraud protection and security, the merchant services offered by the company, the breadth and availability of customer support, and any additional services the processor might offer.
Q: What tech solutions are available for credit card processing?
Some tech solutions available for credit card processing include online invoicing software, EMV smart terminals, mobile payment solutions, online shopping carts, integrated point-of-sale systems, and payment APIs. These tools can help businesses manage payments efficiently and securely.
Q: How can small businesses protect themselves and their customers from credit card fraud?
To protect themselves and their customers from credit card fraud, small businesses should choose a processor with robust data security capabilities. The processor should be compliant with Payment Card Industry Data Security Standard (PCI-DSS) and other relevant recommendations. Some other security measures include additional card information, a track record of implementing evolving tech, and insurance to cover worst-case scenarios.