If you have a small business, one of the most stressful parts about engaging in commerce is setting up methods of payment.
Taking credit card payments can help you to secure transactions, so not knowing your way around credit card processing systems can mean that you miss out on sales. It is not just the systems, but also the latest programs such as the cash discount program that you want to be aware of.
Thankfully for you, we have compiled this informative article to help you learn everything you will need to know about setting up credit card processing systems. We’ll start with what you need and how it works.
Then, we will move into the different types of credit cards that are accepted by merchants, before finishing off with information on how to set up your own merchant account.
In this article, we will cover all kinds of topics that are related to credit card payments, such as:
- The rise in popularity of credit cards.
- Some of the most popular ways to take credit card payments.
- The ways that credit card processing companies set up their fees and their methods of pricing.
- How you may be able to avoid being overcharged for these credit card processing services, and how you may be able to save some money.
- Guidance on how you may be able to avoid any sorts of data breaches or theft of information.
- How you can choose the best credit card processing system for your business and needs.
After reading this article, you will come away with a comprehensive understanding of credit card processing, and be able to make better decisions about processing.
The Rise Of Credit Card Processing
Credit cards have been around since the 1950s, but they didn’t become commonplace until the 1970s. This was when American Express first started offering them to consumers, and banks began issuing them to people who had good credit histories.
By the 1980s, credit cards were becoming more widespread, and many businesses started taking them. In fact, there are now more than 2 billion credit cards in circulation worldwide.
This means that if you want to accept credit card payments from customers, you should be prepared to do so.
You don’t necessarily have to buy a lot of equipment to get going either – you could use an existing point-of-sale machine, or even just a laptop computer. However, if you plan on doing lots of transactions, it might be worth investing in a POS system instead.
People are so keen to pay with a credit card because they are seen as one of the most reliable, simple, and fast ways of exchanging capital for goods.
For merchants, retailers, and service providers, they are seen as an ideal payment method in a world that is increasingly driven by business-to-consumer (B2C) transactions.
Though technology has been pushing us away from paper cash and towards plastic for some time, we reached a tipping point with the COVID-19 pandemic, where the use of cards in both physical and digital retail payments accelerated.
This trend is mirrored in the business to business (B2B) transactions as well. Though there are hurdles and issues that are not typically faced by those who sell goods and services to consumers, it is still reliable and fast.
More and more companies are moving to online sales, which makes using credit cards easier than ever. They also provide a way for sellers to track spending, which helps them keep tabs on their finances.
A Few Benefits Of Accepting Credit Card Payments
There are several benefits to accepting credit card payments, including:
1. It’s easy! As long as you have a working internet connection, you’re ready to go. No need to worry about setting up a merchant account, or creating a new website. Just sign up, add a few products, and start selling.
2. It’s secure! When you process a transaction through a credit card processor, you are protected against fraud. Your customer’s card details are stored securely behind a firewall, and only authorized personnel have access to them. If someone does try to steal your customer’s information, then the credit card company will take care of it.
3. It’s convenient! Customers can choose to use their debit card, check, eCheck or credit card to purchase items from your store. There is no need to ask for any additional forms of identification, like a driver’s license or passport.
4. It’s flexible! With a credit card processing solution, you can set different prices based on how much money your customer spends. This allows you to price high-value items differently than low-value ones.
5. It’s affordable! The cost of acquiring new customers is expensive. But, once you’ve got them, you’ll always be able to collect fees from each sale. Plus, you won’t have to worry about paying for marketing materials, printing costs, or other expenses.
6. It’s scalable! Once you’ve started accepting credit cards, you can easily expand into other areas of your business. Whether you decide to offer gift certificates, membership plans, or anything else, you can simply add it to your checkout page.
7. It’s customizable! A credit card processing solution gives you complete control over your website. You can customize your checkout page to match your brand, colors, and fonts.
8. It’s mobile friendly! Most people shop while they are on the move. So, if you want to attract more customers, make sure your site works seamlessly on all devices.
9. It’s global! Many countries around the world accept credit cards. This means that your customers don’t even need to know what currency they are using when they buy something from you.
The Stakeholders That Are Involved In Credit Card Processing
There are a number of stakeholders that are involved in credit card processing systems. It is a complex, but technologically advanced web of interactions.
Information is gathered and passed through numerous individuals, organizations, governing bodies and channels, which have to work together precisely. These important stakeholders include:
- The cardholder/the person, business or organization who is making the payment.
- The merchant, who is selling a service or a product.
- The acquirer, who is taking the payments from the merchants.
- The issuer, who is issuing the credit card.
- The acquiring bank, who is providing the financial services to the cardholders.
- The processor of the payment, who is the organization that routes all of the relevant payment information to act as a go-between in all communications.
- The payment gateway provider, who provides the interface between the end user (card holder) and the payment system.
- The card network technology, some well known examples include tech like Mastercard and Visa.
Despite this large network of involved organizations, it typically only takes a few seconds to perform a credit card transaction.
How Does Credit Card Processing Work?
So, how do banks process payments? Well, credit card processing involves several steps.
Here is an overview of these steps:
1. Data collection – When someone makes a payment with a credit card, there are three main pieces of data collected by the merchant. They are called the PAN (Primary Account Number), CVC (Card Verification Code), and CVV2 (Card Verification Value 2).
2. Authorization – After collecting the necessary information, the merchant will send this data along with the amount being paid to the acquirer.
In turn, the acquirer (such as Visa or Mastercard) will authorize the transaction. If the authorization is successful, the acquirer will then pass the authorization request back to the merchant.
3. Settlement – Once the transaction has been authorized, the acquirer will settle the transaction. This means that the funds are transferred from the acquirer to the merchant.
4. Dispute resolution – Sometimes, disputes arise during transactions. For example, sometimes the customer may dispute the charges for their account, the bank may suspect that there is fraud, or there may be inadequate funds for the transaction. As part of the settlement process, the acquirer will also resolve any disputes.
5. Once the involved banks have authorized the transaction of funds, then the issuing bank places what is known as a hold on the money that is due to go to the acquiring bank.
6. The merchant will settle a batch of transactions at one time, which is mediated by the payment processor.
7. The payment processor will route the transaction details to the appropriate parties. It will then create a record of each transaction.
8. Finally, once the transaction has been processed, the issuing bank releases all of the necessary funds to the issuing bank, and the money is then deposited into the merchant account.
A Few Of The Critical Pathways In The Processing Chain
As we have covered already, there are a number of important, critical links between stakeholders when a transaction is being completed via credit cards.
Some of the most crucial links that facilitate the necessary chain of events in a card transaction are the payment processor and the payment gateway. But what are the differences and similarities between these two linking entities?
The Payment Processor
The payment processor is a company which deals with both debit and credit card payments for a merchant or organization. The payment processor acts as a middleman between merchants and the acquirers.
The payment processor collects the required information about the transaction and passes it onto the acquirer. The payment processor will also handle the transaction’s settlement, including any disputes.
It should be noted that not every payment processor works exactly like this. There are many types of payment processors out there.
Some of them only deal with credit cards, while others only deal with debit cards. Others still only deal with specific industries such as restaurants, e-commerce sites, etc.
The Payment Gateway
The payment gateway is the technology which facilitates the completion of a transaction using credit cards. A payment gateway allows you to accept credit card payments through your website.
They do this by acting as an intermediary between the end user (the person who wants to make a purchase) and the acquirer. In other words, they act as a bridge between the consumer and the acquirer.
There are many types of gateways out there. Some are built specifically for online purchases and some are designed for brick and mortar stores.
Also, some gateways can be used for both debit and credit card transactions. However, some gateways work differently than others. So, it is best to find out more about the type of gateway you need before choosing one.
For example, if you want to use a payment gateway for your business, you’ll need to know whether you’re going to be accepting credit cards or debit cards. If you’re accepting credit cards, you’ll need to choose a gateway that supports both Visa and MasterCard.
On the other hand, if you’re accepting debit cards, you’ll need a gateway that supports just one of those cards.
You may also need to consider how much you want to pay for the service. You might need to pay a monthly fee for each gateway you use. Or, you might be able to get away with paying per transaction. It really depends on what kind of volume you expect.
Frequently, there are payment gateways that have been designed in conjunction with card processing companies, so using the specially designed gateway can be advantageous due to their increased compatibility.
There are even some processors who only use their own payment gateways, for reasons of secure transaction and data security.
How To Understand Credit Card Processing Fees
Firstly, payment processing is important because it allows your business to efficiently and securely accept and manage transactions from customers.
As with nearly any kind of service in the modern world, there is a price that comes with it. If you are the merchant who is receiving the payment, you will find yourself being charged for all transactions and payments that you run.
The amount that you are charged is dependent on multiple factors, such as the processor that you use, or the kind of pricing model that you have agreed to.
There are a number of fees that you could be charged, such as monthly usage fees, transaction rates, and interchange fees, amongst others.
Credit card fees are charged by the acquiring bank. These fees are usually based on either a flat rate or a percentage of the total amount of the sale.
Merchants typically receive a lower rate for processing credit card transactions compared to debit card transactions. This is because credit card transactions require less risk for merchants.
Merchants don’t have to worry about fraud, since the customer has already paid them for the goods or services. As long as the customer pays off the bill, there’s no reason for the merchant to dispute the charge.
This means that merchants are often willing to take a slightly higher risk when they process credit card transactions. For this reason, merchants tend to be charged at a higher rate for credit card transactions.
Here is a breakdown of some fees you may run into when taking credit card payments:
The fees that a payment processor charges depends on the number and monetary value of the various transactions that are being processed on your behalf, as well as the pricing model that you have chosen.
The typical model is that a payment processor will charge a percentage of each of the transactions that are processed.
For example, if you are charging $10 per transaction, then a payment processor would charge 10% of each transaction.
That means that if you process 100 transactions, the payment processor would charge $1,000. Typically, the processing fee is smaller, and is added to monthly fees/monthly minimum fees and statement fees.
An interchange fee is a fixed cost that an issue bank will charge for dealing with a credit card transaction. Interchange fees vary from country to country, but generally speaking, the average interchange fee is around 2%.
Some banks offer discounts on interchange fees for larger purchases. In many cases, these discounts are not offered on every purchase. They are more common for large purchases made over a period of time.
Some banks also offer discounts to merchants who accept cards issued by other banks. This discount is called an interbank discount.
It should be noted that most banks do not allow their customers to pay for their own transactions. Instead, they pass along the costs to the merchant.
In order to avoid paying too much in interchange fees, it can be beneficial to look for a payment processor that offers a discounted rate. It is possible to negotiate a better deal on interchange fees. You can contact your issuing bank to see what deals they might be offering.
The interchange fee is composed of a few different things. To better understand how to gain a lower interchange fee, you need to know how banks decide how much to charge. The interchange fee is decided by:
- The interchange rate is a bill that the merchant needs to pay every time they make a credit transfer. It varies depending on the type of card used (Visa, MasterCard, American Express), as each card network sets their own fees, and then reviews them periodically. The interchange rate is usually a small percentage of the transaction, as well as a flat rate dependent on the kind of card that is used.
- The assessment fee is a value that is based on the total of your monthly sales, and is paid to the credit card associations.
Together, both of these fees make up the interchange fee.
Some Additional Fees And Charges
Though you can be certain that you will be charged interchange fees and processing fees, there are additional charges that you should be aware of too. These include:
- Merchant Account Fee – A fee that is charged when you open a merchant account with a payment processor. This fee is typically between 1%-3%, and is based on the amount of money that you want to receive through your merchant account.
- Monthly Minimum Fee – A fee that you must pay even if you have no outstanding balance on your account. Some processors require this fee to be paid at least once a month.
- Statement Fee – This fee is usually charged on a monthly basis, and is based on the number of statements that were generated during the previous month.
- Chargeback Fee – This fee is charged when a customer disputes a charge or refuses to pay for goods or services. This fee is usually set at $25 per dispute.
How To Minimize Your Card Processing Fees
Though all the fees you seem to be facing may seem scary, there are several ways to minimize your credit card processing fees.
First, consider using a third party service like PayPal instead of accepting payments directly from your customers. If you use PayPal, you won’t have to worry about any hidden fees or surcharges.
You can also look to interchange optimization to decrease your fees. You can do this by increasing the level of which your data is processed at.
For example, most basic transactions are processed on a pretty basic level, around Level 1, but you can process it on a higher level (such as Level 2 or 3).
This makes the transaction far more secure, decreasing the risk for credit card companies, meaning that they will reward you by charging you far lower interchange costs.
The most sophisticated of the payment processors offer services to aid in interchange optimization, helping you to save on processing fees (sometimes up to 40%) – it is a case of ‘you scratch my back, I’ll scratch yours’, as everyone wins.
You can boost your overall profit, and they take far less risk by increasing security levels.
A Look At Pricing Models
There are a few kinds of pricing models that processors may offer you. Each model offers its own unique benefits, and is therefore suited to different kinds of organizations and businesses.
There are a few pricing models, such as:
1. Flat Rate Pricing
Flat rate pricing is the pricing model where you are paying a fixed, set fee per transaction.
This is a suitable model for small business owners who don’t need much flexibility in terms of how much they charge for each transaction – i.e., a business who has a low volume of transactions, but high value.
The fee remains a flat rate regardless. It is also a good fit for merchants who only accept one type of payment method.
2. Cost Plus Pricing
Cost plus pricing is the pricing model whereby you are billed a fixed cost per transaction, plus an additional percentage of the total transaction amount.
This is a suitable pricing model for businesses who have a large volume of transactions, and/or multiple types of payment methods.
3. Tiered Pricing Rates
Tiered pricing rates are similar to cost plus pricing, however, they differ in that the price increases with the size of the transaction. Moreover, tiered pricing is best used for businesses who have a high volume of transactions, but still want some control over the price they pay.
4. Volume Discounts
Volume discounts are offered by many processors, and are designed to encourage larger volumes of sales. They typically work by offering a discount if you commit to certain minimum monthly volumes.
How To Ensure Data Security
When dealing with credit card transactions, there is a lot of sensitive data that has to be protected.
This can seem daunting and difficult, as the information has to be transmitted around the world through so many channels, and protecting all of the card data is so crucial to avoid fraud and theft.
To take card payments, you should conform to the Payment Card Industry Data Security (PCI DSS), which is the global set of standards that have been constructed to ensure that companies are able to take card payments, store information, and transmit data securely.
These are the main 12 requirements to comply with the PCI DSS as a merchant or a card processor. These are:
1. Firewalls – A firewall is a network device that blocks unauthorized access to computers connected to the Internet.
2. Protected Passwords – ensure you have changed the standard passwords of third party products, such as modems and routers.
3. Protecting Cardholder Data – this means ensuring that your system cannot be accessed by hackers, and that no personal information about your customers will ever fall into the wrong hands.
4. Encrypting any data – encrypting data ensures that it cannot be read by anyone else without permission.
5. Antivirus software – antivirus software protects against viruses on your computer.
6. Updated software – make sure your software is up-to-date, and that it hasn’t been hacked.
7. Restricted access to data – restrict access to your servers, and limit access to your systems.
8. Unique IDs – create unique identifiers for every customer, and keep them safe.
9. Secured locations – keep your servers in secure areas, like a locked room or a vault.
10. Access Logs – track who is accessing your server, and when.
11. Vulnerability testing – test your computers and software regularly for vulnerabilities, and patch any problems immediately.
12. Documentation – document all of your equipment, software and employees that have access, so that you know how these processes operate in your organization.
The minimum should be for your business to be PCI-compliant – and all of these are just the starting point for ensuring that everything is secure and safe.
Our Guide To Choosing The Best Credit Card Processor For Your Needs
There are a number of factors that you should consider when you are picking the ideal credit card processor.
1. Great Transaction Speeds
One of the most important things to look at is transaction speeds. The faster your payment processing speed, the more likely you are to get paid quickly, and the less likely you are to lose money due to slow transaction times.
If you are looking to process high volumes of transactions, then you need to pick a company that offers fast transaction speeds. You also want to find one that doesn’t charge extra fees for their services.
2. Fair, Transparent Structure Of Charges
Another thing to consider is what charges you will incur from using the service. Will they charge you anything? If so, what are they charging you? How much do they charge you per month, per year, or per transaction?
You don’t want to pay too much, but you shouldn’t be paying too little either – it could signify a sub par service! It can be difficult to tell whether the rates being charged are fair or not, so you need to ask lots of questions before signing up.
3. Omnichannel Capabilities
You also need to check if the company has omnichannel capabilities. This means that they can accept payments online, over the phone, through email, and even via text messages.
It’s great if your company can accept payments across all channels, as it makes life easier for your customers. But you also need to ensure that you can receive payments in the same way.
For example, if you use Stripe, you won’t be able to take payments over the phone, and vice versa. So understanding how online payment processing software works is a must.
4. The ERP System Integrations
Finally, you need to check if the provider integrates with your existing enterprise resource planning (ERP) system. This ensures that you can easily integrate your new credit card processing solution into your current workflow.
For example, if you already have an accounting package installed on your computer, then you will probably want to choose a company that integrates well with this software.
In conclusion, there are many types of companies out there that offer credit card processing solutions. Some of them may cost more than others, but all of them should provide you with the security that you require.
When choosing which company to go with, make sure that you understand exactly how they work, and what they charge for their services. Don’t sign up until you know exactly what you’re getting yourself into!
This guide was written by our team – to learn more about how we can help you run your business better, visit some of our other articles! Here is a helpful credit card processing resource guide for all things related to payment processing.
Video on how credit card processing works
Paul Martinez is the founder of EcomSidekick.com. He is an expert in the areas of finance, real estate, eCommerce, traffic and conversion.
Join him on EcomSidekick.com to learn how to improve your financial life and excel in these areas. Before starting this media site, Paul built from scratch and managed two multi-million dollar companies. One in the real estate sector and one in the eCommerce sector.