How does Credit Card Payments work?
If you own a business or have a friend that owns a business, the odds are that you or them have probably dealt with this at one point or another. Everything has been running smoothly in your day-to-day operations when something happens that is unexpected. Either an employee calls in sick, you have a supply truck running behind schedule, or maybe your credit card machine has stopped working. In life, you've come to expect the unexpected. If you're a seasoned businessperson you have realized that it isn't quite as easy to operate a business as one may expect. Things that are out of your control happen and that is okay!
Today, I'm here to help you understand how processing credit card payments works, and also how to select a good payments provider for you.
How does it work?
First, we will discuss how a card transaction works.
To begin, we will go over the transaction cycle. The cycle begins when a customer presents their credit card to a merchant. Once the card is either inserted, swiped, or input into the Point-of-Sale device or software the transaction has begun. The card information is sent out to the card processor, or merchant service provider. The provider then sends the information out to the proper Card Network (Visa, Mastercard, Discover, etc.) And either the issuing bank (The bank or financial institution that provided the card to the customer) accepts or declines the authorization. If the transaction is declined it may be due to lack of funds in the account, or perhaps the card has been flagged as stolen and the account is frozen. However, more often than not, a card payment is accepted by the issuing bank and the approval code for the transaction is passed through the electronic network bank to the merchant's Point-of-Sale device. At this point, the issuing bank then sends the funds to the merchant processing company for collection of the payment. This process is completed within a matter of moments. Once the merchant has completed all of their transactions for the day, a completed 'batch' of transactions will be sent to the processor to be deposited into the merchant's bank account. If the transaction used a credit card rather than a debit card, then the issuing bank will send a bill to the customer.
What is interchange and how does it affect this process?
Interchange is a schedule of fees that determine the price of all credit card transactions. There are hundreds of interchange levels and different qualifications to determine which level a transaction falls into. For example, if a customer uses a Visa debit card for a 'Card-present' transaction, this will be a more cost-effective transaction rather than if the customer used a corporate American Express card to pay for a product online. (Card-not-present) The first factor that determines the cost is the input method of the transaction, or whether the payment was in person or over the internet/telephone. The second factor is the type of card used in the transaction. The individual rates are set by the card brands. These scheduled fees are called interchange fees. These fee schedules are published and public knowledge for anyone to access. They are also subject to change two times each year. This is important to remember since these changes may affect the cost of your ability to accept card payments.
Payment processors give businesses the ability to accept card payments and give access to the networks provided by the card brands. Like most business, processors are also for-profit and charge for this service. In order to determine how much you are currently being charged for your service, your merchant service provider has a document titled "Merchant Statement" This statement typically details all of the transactions in a monthly period, what these transactions cost the merchant, and what was withdrawn from the merchant's bank account in order to cover this cost. Accessing this statement isn't always easy because some providers make it complicated to access, while other providers send it to their merchants on a continual monthly basis. Once you have this document, understanding it can be a bit complicated. If you are the type of person that doesn't mind doing it yourself, you can look up the current interchange table costs and compare this with your statement. Keep in mind the different qualifications for the different transactions types. This can be complicated, and most business owners do not have time for this. If you prefer not to do this yourself you can also get a price comparison from another processing company. This leads us into the final section of this article.
How to select a good processing company
Shopping for a good processor can be tricky. Like shopping for anything else, it is important to remember that you get what you pay for. If you are a business owner you probably take pride in the service or product that you provide to the public. McDonald's could have a cheaper product than a locally owned burger joint, but how does the quality and experience of the product compare? It's important to keep in mind a few factors when shopping for another provider. Of course price is a huge factor, but customer service is also an important factor to keep in mind. Other pain points for some merchants may be how long their bank deposits are taking, or if they have low-level technology they are operating with and need an upgrade. If you are having specific problems in your business it is good to ask the provider about the solutions they provide for this problem and how they service their customers. Sometimes providers may offer a great deal on technology upgrades, but may want to lock you down in contract so that you are stuck with them. Other companies disagree with this and don't lock merchants down into contracts so that the merchants can put adequate pressure on the provider to provide high-level customer service. Above all, I recommend working with a company that provides you with a dedicated customer service representative that can help you if issues arrive, and is easy to contact so you don't have to be on the phone with tech-support while trying to operate your business.
For someone you can ask for advice in this area of your business, feel free to connect with me through the information provided below.
