The credit card processing system that we take for granted every day has a lot of moving parts. Many business owners think of this process in the same way as meat eaters think about the process of making hot dogs – they would rather not see how it is made, they just want to have one at the right time. However, it is helpful to understand a bit about how credit card processing system works, and more importantly, how to put you, as a business owner in a position to maximize profits.
The main players in the process are the merchant, the issuing bank, the acquiring bank, the merchant services provider and the association. A brief description of the roles:
· Merchant (business owner) – accepts credit cards for payment and services. Opens a merchant account with a Merchant Services Provider (MSP).
· Issuing bank – issues credit cards to customer (cardholder) based on their credit worthiness
· Merchant Services Provider – Provides the business owner with the processing system, hardware, and credit card banking network that best meets their needs.
· Acquiring Bank – processes payments through to the issuing bank, and passes payments back to the merchant, less their fees.
· Associations – Visa and master Card are examples of associations of banks that agree to certain rules.
When a card is presented, the sales draft goes to the acquiring bank that routes it through the association to the issuing bank. The issuing bank then approves the purchase, and communicates that back to the acquiring bank that approves the transaction. This all takes place fairly quickly. This is what’s going on when the restaurant ‘runs your card through.”
Later the merchant will batch its transactions and send them back to the acquiring bank for payment. The acquiring bank then forwards this info on to the association who then takes money from the issuing bank. This step is called clearing and settlement. The last step is for the acquiring bank to pay the merchant, less the discount fees. This last part is called “funding”. The whole process takes between one and three days.
Customers usually initiate any charge backs, returns, or cancellations through the issuing bank.
Why should a business accept credit cards? Accepting credit cards is usually a good thing to do because it offers customers a convenient payment option. The downsides of course, are fees and additional point of sale equipment, like terminal, pin pads and the like. The benefits of fees are in fraud protection, and faster payments to the merchant.
Most customer or web oriented businesses can usually benefit from credit card acceptance. According to Forbes Magazine, 82% of American Express card members and 79% of Visa and MasterCard holders agree that regardless of the nature of the business, merchants should offer customers as wide an array of payment vehicles as possible.
Here is a list of 10 things that a merchant needs to know and do in order to minimize credit card processing costs – and keep more of your business transactions. A little piece of advice: It is always best to seek the advice of a professional in this area – it costs you nothing, and you have the potential to tilt the table in your favor.
1. Decide how best to accept cards – If your business processes 10 or fewer transactions per week, a phone authorization is all that is needed. For higher rates of transactions, magstripe card swipe terminals or PC based card acceptance software should be considered. Internet businesses can use virtual terminals with shopping cart. You’ll need to decide how the card information will be recorded. Options are: manual entry, a card imprinter, a point of sale (pos) terminal, or virtual terminal.
2. Get the best Interchange qualification rates. Every merchant pays a merchant discount fee in order to accept payment cards. Interchange fees are a component of that discount fee and include the fees that Visa and Master Card charge to get the funds into the merchant’s bank and get the billing information to the cardholder’s bank. Some things to know about interchange fees:
3. Interchange rates vary by type of merchant or industry and the type of card the cardholder uses
4. New businesses most always pay premium rates, because they are considered a bigger risk.
5. Retail businesses can keep costs to a minimum by taking steps to ensure they process ‘qualified” transactions – the cheapest category of interchange that applies to a transaction where the merchant physically swipes the card through the terminal and receives authorization
6. Interchange rates are higher for non-retail businesses where the purchase is made without the customer’s presence.
7. Merchants who want to accept cards over the internet should maximize their security mechanisms use either AVS (Address Verification Service, or CVV – Card Verification Value (3-4 digit code on back of a card).
8. Avoid charge backs by acting promptly to resolve a cardholder’s dispute. A chargeback translates into extra costs.
9. Automatic settlement allows all transactions to be automatically settled without the merchant having to batch their daily card receipts. It is however, more expensive than manual batch settlements.
10. Most MSP’s offer lease arrangements for POS equipment, avoiding larger upfront costs.
The right card processing solution for your business depends on the nature and volume of your transactions. Banks are not always going to have the best solutions. It would serve your bottom line well to have a free annual review by a merchant services professional, and it is essential to have that consultation for first time credit card acceptors.