A To Z Of Credit Card Processing
Credit card processing might appear straightforward: customers swipe or insert their card, and the transaction is either approved or declined. But behind-the-scenes payment processing requires multiple steps between businesses, issuing banks, acquiring banks and payment networks.
Understanding how payment processors work can help you select an ideal processor for your business.
1. Authorization
Consumers prefer using credit and debit card payments when purchasing products and services from businesses, and credit card authorization plays an integral part of this transaction. It verifies both that the card is valid as well as sufficient funds in their bank account to cover the transaction total, helping protect both customer and merchant against fraud.
There are multiple steps involved in the credit card authorization process, many of which take place behind-the-scenes. Authorization occurs when cardholders swipe or insert their cards into card readers at point of sale; after several seconds, these readers either approve or decline the transaction.
"Authentification" and "authorization" are often confused; however, these two processes are very distinct from each other. To illustrate the distinction, consider this scenario: when visiting a friend's house, she recognizes you (authentication). She feels comfortable letting you into her home because she knows who you are; later she grants permission for you to do certain activities (authorization); such as accessing certain parts of their kitchen area but denying access to her private office.
An Authorization History Code that is generated after successfully completing an online credit card authorization request and can be seen through Order Inquiry is produced after successfully completing online credit card authorization requests. This six digit alphanumeric code will then be saved into Authorization History file for further reference through Order Inquiry.
An acquirer provides this service as a good-faith attempt at reaching a solution before filing with the card association for violation.
2. Settlement
Most merchants don't give much thought to how the settlement infrastructure for credit card payments works - though having some knowledge might come in handy! Although we might not contemplate how a plane flies, having at least an understanding of this process might prove beneficial.
Credit card processing settlement is how your revenues earned from accepting credit cards actually reach your business bank account. While authorizations can take place quickly, getting them from customers to your account often takes more work. Batch processing and settlement are part of this process to help facilitate it all.
Settlement refers to all approved credit card transactions you completed during one business day and sent as one batch for settlement by your processor (and possibly the bank that issued your customer's card) and card network(s). Your processor then transmits this settled batch directly to them; card networks debiting issuing banks' accounts by deducting net amount due (gross receipts minus interchange and network fees), then deposits it into merchant account(s).
Some processors may charge a fee to settle your batch, typically representing a percentage of its value. This fee could be charged daily, monthly, or as an add-on to your overall transaction processing fee.
Offset costs for merchants is an industry practice often done to offset expenses; however, this practice should be avoided to prevent hidden fees that you should avoid. Before signing any payment processor contract or wholesale credit card processing club agreement with them, make sure you understand their processing rates and terms as well as any hidden or inflated rates they charge you. CardFellow members have access to fair pricing with competitive rates along with ongoing support to help their businesses grow successfully.
3. Clearing
The clearing process translates the promise of payment into actual movement of funds from one account to another. It works similarly to when using bank cheques for purchases; however, credit card transactions tend to clear much faster as credit card transactions tend to clear within hours rather than days.
Credit card clearing begins when merchant banks (also referred to as acquiring banks) send all approved authorizations in one batch to its processor, who in turn sends this data off for clearing by the credit card network. After clearing, it credits issuing banks for authorized payments while deducting any applicable interchange or network fees before sending the net amount onward to merchant accounts.
This process remains the same whether accepting credit cards online, in person, by mail or phone. Visa and MasterCard both play an essential role in clearing payments between cardholders, merchants, card issuers and acquirers as well as setting data formatting standards and settling funds between member banks.
Understanding the processing lifecycle is vital when choosing credit card processing providers that will best fit your business. Knowing what happens behind-the-scenes can help avoid hidden fees or issues that might arise later. If any parts of the process remain confusing to you, don't hesitate to reach out - our mission is to ensure small businesses receive customized processing solutions tailored specifically for them. Ben Dwyer is the creator of CardFellow, an online platform designed to assist small businesses in finding transparent, competitive, and consistent pricing for their merchant accounts. He began his career on the sales floor of a large processing company and soon found himself disillusioned with unethical practices and limited support available for small businesses. So in 2009 he founded CardFellow to fight for transparency and fairness across all of industry.
4. Processing
Credit card processing allows businesses to accept payments efficiently, safely, and quickly - but consumers and business owners often have little understanding of the complexities behind the scenes.
Credit card payment transactions involve numerous key players. A cardholder and their issuing bank are at the core of any such transaction, while merchants and processors provide connectivity through networks of cards and provide details about it to both banks involved - while fees are assessed at various stages during its completion.
No matter if a customer swipes a magnetic stripe card, taps their contactless card at a point-of-sale (POS) terminal in a physical store, or uses their mobile wallet online, merchants send requests for payment authorization directly from their POS systems to card networks; those networks then relay approval or decline responses along with important data back to merchant's acquiring bank.
Once an acquiring bank processes payment authorization, funds will be sent directly to merchant accounts - this process is known as clearing. At that point, they'll pay their issuing bank while subtracting their own processing fees as payment for purchases authorized.
Credit card processing can be complex and challenging for small businesses, but there are resources available to them that will make the process simpler. To make understanding credit card payments simpler for them, we've put together an informative guide which details key players involved and answers frequently asked questions about its process.
5. Fees
Credit card processing fees can be one of the biggest expenses for many businesses. Understanding their workings will allow you to better anticipate costs and create more accurate financial projections, while finding one with suitable pricing structures and rates for your needs can make life much simpler.
Fees associated with credit card transactions are assessed from multiple parties: the card's issuing bank (interchange fee), credit card networks (assessment fees), and companies providing payment processing for your business (payment processor fees). Understanding these charges can help shed light on why your processing fees are the way they are, as well as lead you to finding more affordable providers.
Interchange rates, set by Visa and Mastercard, make up the bulk of credit card processing fees. They vary depending on factors like customer card type and whether or not it's credit or debit. Assessment fees charged by card networks also account for significant portions of these costs and cover charges such as chargebacks, fraud costs, network operating expenses, etc.
Other costs related to credit card processing may include fixed per-transaction and monthly service fees from your payment processor for their role in handling credit card payments. These fees can differ widely depending on which processor and merchant pricing model they use - some charging no markup at all! Usually your statement will detail each cost so you know exactly what it covers.