Understanding The Totality Of Credit Card Processing

The Who’s Who of Credit Card Processing

In order for any transaction to be completed, there are several steps and players involved along the way. First, let’s look at the players:

The merchant

Of course, no transaction is complete without a merchant selling a product or service. The merchant is responsible for accepting and credit or debit transactions through a payment terminal or online payment portal.

The customer

The customer can swipe, dip, tap, or key-in their card information to complete any transaction.

The processor

Each merchant must partner with a credit card processor (also known as a merchant service provider). They are responsible for facilitating each transaction and ensuring full PCI compliance and data security.

The POS provider

A merchant will also need a point of sale system to complete each transaction. The POS solution may be independent of the processor or provide the processing service in addition to the point of sale software.

The card networks

VISA, MasterCard, American Express, and Discover are the four most common. These businesses are responsible for attaching the interchange fee to each transaction based on its assessed risk. Think of these companies as the regulators of the industry who take a fraction of a percent of each transaction.

The acquiring bank

The merchant’s bank will accept any funds for the business once all payments are approved and fees deducted.

The issuing bank

The customer’s bank must approve or deny each transaction based on the amount of funds or credit available in the customer’s account.

The Steps of a Credit Card Transaction

Though taking just seconds, each transaction goes through a series of steps before it is finalized. Once approved, there are a few additional steps before the money is eventually deposited into the merchant’s account .

Step 1:

The customer pays for a transaction on a credit card terminal or online payment platform.

Step 2:

The card’s information and transaction data is sent to the issuing bank to determine the legitimacy of the payment.

Step 3:

The issuing bank returns an approved or denied label to the merchant’s terminal.

Step 4:

Transaction details are also sent to the card networks who assign an interchange fee to the transaction based on its risk.

Step 5:

The merchant batches payments at a predetermined time frame to begin finalization.

Step 6:

All fees are deducted from the total amount of the batched payments.

Step 7:

The remaining value of the transactions are deposited into the merchant’s account at the acquiring bank.

The Fees of Credit Card Processing

For the services of facilitating this process, there are several different fees involved. Though the fees are relatively straightforward, some processors intentionally complicate the process to decrease transparency and add extra fees.

Interchange Fee

This fee is assessed by the card networks. Though they assess, they take only a tiny portion of it. The vast majority of it goes to the issuing bank.

The fee is based on a number of factors related to the risk of the transaction. These include the types of card used, the way the card information was input, the brand of the card, and the merchant’s industry.

The final fee is non-negotiable and uniform across any industry. Instead, retailers can implement rules with regards to the types of cards and minimum amounts that they will accept at their store.

Assessment Fee

As mentioned above, the card networks will take a small portion of the interchange fee. This varies based on the network, but usually hover just above 0.10%. American Express famously has a slightly higher assessment fee, which is why some merchants opt not to accept it.

As an example, here is the breakdown of VISA’s interchange fees and associated assessment fees.

Processor Fee

The credit card processor will also take a fee for their services of helping complete each transaction. But this is where things get more complicated. The structure of these fees varies and can add additional charges. More on that below.

Additional Fees

Some processors charge additional fees for miscellaneous items. These may include chargebacks, payment gateways, PCI compliance, hardware leases/rentals, support, cancellation, charge minimums, and more. None of these fees are necessarily standard.

How to Save Money on Processing

While some processing costs are inevitable, there are ways the small businesses can still save on their total costs. Let’s look at some of the easiest ways to do so.

Start with Your POS System

A lot of point of sale systems are now also processing payments. While this bundled option may be advertised as more convenient, it only serves to lock users into unfavorable rates. These POS solutions require their users to use their processing and often push for long-term contracts.

This is never in the best interest of the merchant. Look for retail POS software that allows its users to choose any processor that they’d like.

Get Interchange Plus Pricing

There are several different pricing structures from processors. Some of them are less transparent and bundle all fees into one flat rate. This is confusing and doesn’t allow users to see exactly what they’re being charged for.

Interchange plus keeps it the most simple. Merchants are charged for their interchange fee and the remaining fees charged by the processor are tallied separately. By so doing, processors can show their customers exactly how much and for what purposes they’re being charged.

Reduce Your Interchange Rates

There are some ways that retailers can lower their interchange fees. For instance, eCommerce transactions and online payment portals will always have higher fees. Keying in transactions will also result in additional fees.

Certain cards come with higher interchange rates, too. Amex and Discover have higher network fees than VISA and MasterCard, and higher rewards and business cards also raise the interchange rate.

Think about some regulations you might want to implement at your checkout.

Understanding Credit Card Processing

Overall, hopefully this gives you a primer on how processing works, what goes into each transaction, and how businesses can be on the lookout for ways to save money.

Too often, small businesses are unknowingly wasting thousands of dollars each year simply because they don’t know how their processing works.

Start saving now and think about all the ways you can allocate that extra money to improving your business!