Credit card processing has a bad name among businesses as it is often called the “necessary evil.” Indeed, payment processing systems are often confusing, expensive, and overwhelming for many at the initial stages.
However, if used right, a credit card processor will be beneficial for the business in multiple ways. To build a positive payment processing ecosystem, you need to gain a better understanding of how the system works, what options you will get, and what exactly you are paying for.
In this article, we will go over the basics of a credit card processing solution, the processing fees charged, the players in the industry, the risks involved, and everything else in between. Stick around till the end, as we are going to understand the functioning of a payment processor in detail.
As a bonus, we have added a brief discussion at the end about chargebacks and risk holds, and what you can do best to avoid them!
The Players Involved in Credit Card Processing
The moment your customer swipes their card, a number of parties jump into action. They include:
- Merchant: A merchant is the business owner who wants to accept payments from the consumers, and therefore, would require credit card processing.
- Cardholder: The cardholder is the customer who is paying the merchant using their credit card for the purchases made.
- Card Association: Some of the popular card association brands include VISA, MasterCard, Discover, and American Express (or AMEX). These are not banks, though; rather, they are the governing bodies that arbitrate between the issuing and acquiring banks, set interchange rates, and improve and maintain their networks.
- Acquiring Bank: The merchant’s bank is referred to as the acquiring bank, which holds the merchant’s funds. It is so named because it “acquires” the money from a sale, that is, after a consumer makes a transaction for a purchase. In this context, an acquiring bank accepts the funds after a sale is made, which is successful only after the card is authorized. The money collected gets deposited into the merchant’s bank account.
- Issuing Bank: The issuing bank is the cardholder’s bank that issues cards to the customers and is also a part of the card associations. The issuing bank pays the merchant’s acquiring bank for the purchases and transactions made by a cardholder. Next, the cardholder or the customer is responsible for paying back the required amount as per the terms and conditions of the credit card agreement.
- Payment Processor: This is the credit card processing provider that handles the batching and processing of the payments made using debit, credit, or gift cards. A payment processing company usually assists the merchant with technology needs and solutions, while also providing a customer support service. Hence, a payment processor acts as a middle-man to the banks and the card associations.
The Payment Process
Each time a customer makes a payment using a credit card, each of the above players comes into play. Let’s have a look at the step-by-step payment process to understand how they work together.
Step 1: Your customer uses their credit card to make a payment for a purchase.
Step 2: The customer swipes their credit card through a payment processing terminal, which then recognizes the card and transfers the information to the credit card processing provider.
Step 3: The card is verified or authorized.
Step 4: Next, the credit card processing company transfers the payment to the merchant’s bank via a certified merchant services provider, such as Host Merchant Services.
Step 5: The merchant’s bank or the acquiring bank deposits the funds into the merchant’s bank account.
Step 6: At the end of the month, the merchant receives a statement containing details about the interchange fees for all of the transactions done in that entire month. The credit card company sets the interchange fee for enabling merchants to accept credit card payments.
The Service Fees Involved in Credit Card Processing
Now that we are aware of the parties involved in the entire payment processing solution and the role played by each, we will head on to discuss the types of fees charged whenever a payment is made.
Although the fees charged vary based on your particular merchant service company, we will understand the basic service fee structure involved with the process. However, focus on your monthly fees and ensure that you are not paying too much for your credit card processing.
- Transactional Fees
- Transactional fees are associated with every payment you accept. We can break them down into two parts: a) interchange and b) cents per transaction. Both of these are mandatory fees charged for using the credit card processing service, and these are set by the payment processing company itself.
- Basically, you will be paying card association companies like MasterCard, VISA, Discover, and American Express for being able to accept their cards. Although the interchange fees are collected by the card networks, these will eventually be paid out to the issuing bank, which has issued the payment card.
- Interchange rates might differ depending on the card type you are running, since different card association companies charge different rates. These are transaction fees that your (the merchant’s) bank account must pay every time a customer makes a purchase using a credit or debit card from your store.
- You pay interchange fees to the card-issuing bank to cover handling costs, bad debt, and fraud costs, as well as for the risks involved while approving consumers’ payments.
- The more expensive it becomes for your credit card provider to maintain the card along with its benefits, like cashback, rewards, and additional perks, the higher will be the interchange fees charged.
- This also means that debit cards are the least expensive and business credit cards are generally the most expensive.
- Recurring Fees
- Apart from the interchange fees, many providers like to impose additional charges to make extra profit. You can see these charges on your monthly statement and they generally recur every month. However, these recurring charges are actually not required to accept credit card payments.
- Be on the lookout for monthly fees charged, along with batch fees and statement fees, annual fees, next-day funding fees, IRS report fees, and so on when you receive your monthly statement.
- One-Off Fees
- When the above charges aren’t enough, there are even more charges based on individual actions or services. Some of them include terminal fees, setup fees, early termination fees, reprogramming fees, address verification fees, PCI compliance fees, payment gateway fees, and chargeback/retrieval fees.
- Hence, you need to keep a close eye on the statement to track the fees your credit card processing company is charging every month. Many merchant services providers tend to make huge profits by imposing charges many merchants are not even aware of. So make sure you know all of the services and benefits that you are paying for.
- With Host Merchant Services, however, you will get a simple and transparent payment processing statement every month. We never add any hidden charges for making a profit. Our sole mission is to provide the best credit card processing services and benefits to merchants.
Credit Card Processing: The Pricing Models Involved
The pricing models might again vary depending upon the merchant services provider. But the following are some of the common ones.
- Percentage Markup
- As the name suggests, in this pricing model, payment processing providers will charge an additional percentage on the interchange fees for every transaction made. This means that the final costs of every card will be different.
- However, it’s hard to predict what exactly your provider will be charging you every month under this pricing model, since the interchange fees vary based on the card type accepted. In short, the more you pay, the higher amount of markups you will need to pay.
- Flat Rate
- A flat rate is simply a variation of the percentage markup model. It’s just that in a flat-rate model, providers charge the same percentage for all cards, instead of charging an extra percentage on top of the interchange. A popular example of a merchant services aggregator following this pricing model is Square. Square always charges 2.9% of every transaction, regardless of the card type used.
- Indeed the system looks perfect at first. However, one downside to this pricing model is that the more you process, the more expensive the overall system becomes, especially when you need to process a lot of cards having low interchange fees, such as debit cards.
- Tiered Rate
- The tiered pricing model, also known as bundled pricing, is one of the most expensive ones so far. Because tiered rates set the charges by putting different cards in different tiers. The fees charged in this model can be broken down into three tiers: a) Qualified, b) Mid-Qualified, and c) Non-Qualified.
- One thing you need to remember is that the tiers are determined by the providers, so they can be arbitrary. Some providers even go a step further to check out the most popular card types to make sure that they are falling under the most expensive tier. If not, they might also charge additional fees for various credit card processing services, all of which you do not even need.
- Sadly, very few merchants question such expensive pricing models, mostly because they believe that there are some valid reasons behind the fees they are paying. However, in reality, there isn’t a reason for charging such high rates. So, it’s always better to make it clear by asking your provider directly, especially when you see terms like “qualified,” “non-qualified,” or “mid-qualified.”
- Simple Flat Rate Subscription
- These are by far the most popular credit card processing pricing models, and are generally the best choice for most merchants. In this model, no matter how much you process, you only pay a monthly membership or subscription fee in exchange for the direct interchange cost.
- In other words, in a subscription-based model, you only need to pay a flat membership charge and the direct costs of the cards you process. Merchants can usually save money in this pricing model, unlike the other expensive ones.
Security and Compliance
If you are accepting credit cards, you are responsible for the proper management and handling of your consumers’ sensitive personal and cardholder data, especially during a transaction. In facing rising cybersecurity threats and vulnerabilities, you need to safeguard your customers’ privacy by offering them a safe and secure payment environment.
Merchants can stay safe and compliant with the industry’s security standards in two ways: a) PCI Compliance, and b) EMV Compliance. Let’s discuss each of them in detail.
- PCI Compliance
- PCI or Payment Card Industry, refers to a set of security standards set to protect the sensitive payment or personal information of your consumers. PCI also ensures that merchants accepting credit cards are taking proper security measures and are complying with all of the security requirements.
- To achieve and remain PCI compliant, you need to complete a brief questionnaire once a year. Most companies don’t take this issue seriously and end up facing a number of cybersecurity attacks. In this case, not only are you hampering your consumers’ safety and security, but also losing your reputation.
- According to Verizon’s recent report (2020 PSR), a sharp decline in PCI compliance is found in global organizations, putting their customers’ cardholder data at risk. The report further states that on average, only 27.9% of companies worldwide have managed to remain fully compliant with PCI DSS.
- If you are not PCI compliant, your credit card company itself would charge you a heavy PCI non-compliance fee. And this fee has nothing to do with your merchant processor.
- Host Merchant Services will help you to remain PCI compliant so that you can avoid these costly non-compliance fees, while also keeping your consumers’ information protected.
- EMV Compliance
- As you might already know, an EMV, acronym for “Europay, MasterCard, and VISA,” is a chip card technology that has gained much popularity across the US in recent years. EMV chip technology is the most updated and advanced global standard for card payments. These are chip-based payment cards that come with enhanced features for preventing fraud cases, like cloning or skimming.
- The magnetic stripes embedded in the chip technology of an EMV card store information, which can be copied by hackers or scammers. Chips are designed to uniquely encrypt one’s card information every time it is used. It is designed to prevent scammers from stealing or copying your sensitive data from the card, thus preventing any unauthorized purchases.
- If you are not EMV-compliant, you can run the risk of being held responsible for any fraudulent activity. Also, to get the best out of the EMV card processing system, you must train your staff, especially sales reps, about the chip technology, so that your consumers don’t insert their cards incorrectly or take them out too soon from the terminal.
Payment Processing Technology
Every business follows unique payment processing technologies. The success of a business largely depends on selecting the right technology for accepting payments. Therefore, you really need to understand what your business needs and which payment technology solution can address your specific requirements.
Some common payment technologies include:
- Online Invoicing
- Invoices are a vital part of billing. However, many business owners still rely heavily on manual invoicing processes, such as using Microsoft Excel templates. Manual methods of generating invoices are time-consuming and subject to human error, thus losing accuracy and efficiency.
- It’s time to switch to online invoicing tools as they help to save you time and effort, enabling you to focus more on your core business areas. And some of these solutions are very cost-effective.
- Mobile Payment Solutions
- These are the best solutions for on-the-go business owners, because mobile payment technology alone can make your business grow. For some organizations, a simple mobile solution can be enough to get the job done.
- However, a majority of business owners would best benefit from using various apps for sales reps or trade shows and mobile card swipers to accept payments faster and more securely.
- EMV Smart Terminal
- Physical payment processing terminals are an excellent option for brick-and-mortar businesses. If you have a lot of customers visiting your physical store and swiping their cards to make a purchase, then you might want to adopt an EMV smart terminal.
- But make sure that the machine you are planning to buy has full support for EMV and is also NFC technology-enabled. This way, you can accept chip cards and even contactless payments, such as Apple Pay, Google Pay, Samsung Pay, PayPal, etc.
- Online Shopping Cart
- Online shopping carts that are driven by payment gateways are crucial for eCommerce stores, even if you operate a brick-and-mortar store location. Because you want to drive traffic from all sources possible, especially when you have an online marketplace.
- Ever since the coronavirus pandemic, there has been a stark rise in the number of online purchases. And the trend is going to remain for many more years to come.
- Therefore, it’s time you optimize your online portal and include an efficient online shopping cart as well as a smooth checkout process. Your website or mobile eCommerce app is one of the most essential places to drive traffic.
- Moreover, processing payments via an online shopping cart is super simple. All you need to do is activate your payment gateway through a few hassle-free steps, such as by placing a quick call to your provider.
- Application Programming Interface (API)
- If you are looking for a specific payment solution for your eCommerce website or app, you can use a payment processing Application Programming Interface, or API. Some merchant services providers even share their API technologies with developers, who can then integrate them into the applications or web pages they are building.
- APIs can be a perfect online payment processing solution for business owners seeking more customizable shopping experiences.
- POS or point-of-sale solutions are significant for retail store locations or restaurants. POS solutions or terminals are large, integrated machines that use devices like a cash register, a computer monitor, and an online credit card processor.
- POS machines can come in a range of shapes and sizes. Do your homework well to choose the right features and tools for meeting your unique business needs.
Chargebacks and Risk Holds
Nobody likes the idea of getting chargebacks or risk holds, as they can directly affect your business’s finances. Hence, you need to consider the various possibilities and think about how you can handle such grave situations. So, before you panic, read on to learn about tackling chargeback or risk hold cases.
- Chargebacks exist to protect your customers from fraudulent activities. You will get a chargeback when a consumer raises a dispute against a certain charge to their account from your business. It means that you are responsible for the chargeback costs.
- That’s why being EMV compliant is totally necessary. If you aren’t, you will be held responsible for the chargeback liability. And if you are EMV compliant, the chargeback will usually fall on the cardholder.
- However, remember that the process can take weeks to complete. During this time, the bank will hold the funds until they make the decision of which party is liable. To win a chargeback dispute, you need to submit compelling evidence of purchase and transactions, such as invoices and other documents.
- To avoid chargebacks, ensure you follow these steps:
- Use an online credit card processor having strong security standards.
- Follow appropriate credit card processing methods and requirements.
- Have a contract in place to describe what the payment is for, thus minimizing delivery or transactional confusions.
- Train your employees to keep an eye on any fraudulent attempts to prevent chargebacks before they occur.
- Always provide an exceptional customer support service. Try resolving issues directly with your customers first before the case is escalated to the banks.
- Risk Holds
- A risk hold is a routine process that a majority of merchants experience, especially during the first few weeks of processing via a new merchant services account. Risk holds are done deliberately to check that everything is in place and that there are no signs of any fraudulent activity, thus protecting your consumers.
- If you process sales that exceed your approved range, then the underwriters will raise a risk hold against you. After this, the funds you generated from the transaction will be held until you provide valid documentation for the sale.
- To avoid such kinds of disputes, try to be as accurate as possible on the application for your merchant services provider.
We appreciate your bearing with us for so long! We hope you were able to get a basic idea of how a credit card processing solution works. You have also learned about the various payment processing technologies, the security and compliance factors and requirements, and how you can avoid chargebacks or risk holds!
Contact Host Merchant Services for getting into the details about the benefits you will receive, our pricing models and fees, our customer service support, and so more. We hope our cost-effective, efficient, and customized solutions will take your business to the next level!