Merchant Warehouse has been helping business owners save money on their credit card processing costs since 1998. New merchants often believe that accepting credit cards simply involves purchasing a credit card terminal and connecting it to their bank account. However, the process involves several key players and a number of steps to ensure that the maximum amount is delivered to you, the merchant.
If you are new to processing credit cards, or have been accepting them at your business for years, you may also be interested in learning more about how the process actually works. We have developed the following presentation to walk you through how the information you collect from your customers eventually delivers money into your bank account.
Learn more about Credit Card Processing
As a merchant, you've probably wondered what happens from the time you accept your customer's credit card to the time you receive payment. Click on each of the sections below to walk yourself through the process.
Before jumping into the process it’s important to first review some of the key players involved:
Customer/Card Holder - The customer/card holder is someone who buys goods or services from a business. In this process it is an individual authorized to use the card to make a purchase.
Merchant - The Merchant is a business person who buys and sells, in order to earn profit. In this process it is the legal entity authorized to accept the card for the goods sold or services rendered by the business.
Processor - Merchant service providers that send the details of the processing card transaction between the merchant, bank and card issuers.
Card Payment Brand - The consumer payment system whose members are the financial institutions that issue payment cards and sign the merchants to accept these cards.
Card Issuer - A financial institution that issues payment cards and maintains the contract with the cardholder for repayment
The process of confirming whether your customer's credit card is valid and if it has sufficient credit to purchase goods or services.
Without authorization you won't be able to accept your customer's credit card for payment—and that could mean lost sales. You can obtain authorizations through a point-of-sale terminal, virtual terminal, smartphone swiper, e-commerce website, or over the phone.
How Authorization Works
Authorization follows these steps. Generally, this entire process occurs within a matter of seconds:
- Depending on how you run the card, this information is transmitted to a Processor (for instance, in a card-present environment, you swipe the card and enter the dollar amount, then send this information to the Processor).
- The Processor forwards your request to the card payment brand, such as Visa® or MasterCard®.
- From there, the payment brand sends your request to the card issuer (the bank that issued the card to the customer).
- The issuer approves or declines the transaction and sends this response to the payment brand.
- The payment brand sends the response to the Processor.
The Processor forwards the response to you (either via your point-of-sale device, e-commerce website, over the phone, etc.), so you can complete the transaction.
The card will be approved, declined, or referred for purchase.
An approval means that the dollar amount you specified will be reserved from the cardholder's available credit limit for future settlement.
A decline means that the customer's card cannot be used to complete the purchase.
As a merchant, the most important part of payment processing is whether or not your customer is able to use his or her card. Be aware that you may receive a declined response for a number of reasons:
- a customer is spending more than his or her credit limit
- or…a card is lost or stolen.
It is not your responsibility to explain to your customer why his or her card was declined. For this reason, the decline information is not transmitted to you. If a customer requests more information about the denial, direct them to use the customer service contact information on the back of the credit card.
A referral is a request for additional information (either from the merchant or the cardholder) before an authorization can be issued.
An issuer may send a referral response as a security measure. If a referral is received, the Processor will contact the issuer directly and request an authorization on your behalf. The issuer may request to speak with you or your customer/cardholder over the phone to confirm the legitimacy of the transaction before issuing the authorization. A typical example of when this occurs is when the cardholder:
- is trying to make a purchase in a foreign country
- is using his or her card more than usual in a short period of time
- or…has reached the credit limit.
Settlement refers to the process of managing electronic payment transactions so they can clear and be funded.
You've made the sale! Depending on your business, your customer has either left your store, logged off your website, or hung up the phone, considering the sale complete. For you, however, the transaction is still in process, since it must now be settled. To make this happen, the approved card transactions must be presented to the Processor. The Processor then submits those approved transactions to the payment brands for clearing through interchange. You may hear these transactions referred to as "deposit" transactions.
Interchange fees are fees that a merchant acquirers or merchant services provider pays to card-issuing banks.
Other costs to the acquirer include:
- Processing fees: paid to the processor for running the transactions and settling funds
- Assessments and association fees: paid to Visa, MasterCard and Discover
The rates for each interchange category are as complex as each credit card, and each transaction type has a specific cost that creates a grouping of over 700 rates.
The interchange category under which any single transaction falls will depend on various factors:
Where the card is processed is just one of the factors in determining which fees will be applied against the transaction. Purchases that occur in a physical store location are seen as less risky by the card issuers than those taken online, over the phone, or even face to face in a non-brick and mortar environment. As a result cards processed face-to-face in a retail location typically have the lowest fees associated with them.
The Merchant's Card Acceptance Method
How the card information is captured also plays a major role in the fees assessed to each transaction. A retail location that physically swipes the card through their processing equipment will be charged lower fees than if they were to type or "key" the information in.
Security Information Sent With Transaction
When the card information is collected there are other data points that a merchant can collect to help decrease the risk associated with the transaction. Collecting items such as the card holders address and/or zip code, also know as AVS or address verification, and sending this information with the transaction can help assure the card issuer that the card is being used by the cardholder and not a third party for a fraudulent purchase. By reducing the risk of fraud, the merchant further reduces the fees they are charged on each transaction.
Card Brand and Type Accepted
As of October of 2012, there were over 700 interchange rates among the card brands and transaction types. Each card has its own rates associated with it, which vary based on the factors above. Corporate and Rewards cards often have the highest rates associated with them, as the card issuers leverage the higher fees on these cards to finance the rewards and offers the cardholders receive. Debit cards have historically had the lowest rates, and were lowered even further following the Durbin Amendment, passed by the Senate in 2010, which allowed the Federal Reserve to cap transactions fees for large institutions.
How Settlement Works
This is how settlement works:
- Typically your terminal or point of sale device automatically triggers, or “batches” a settlement, unless further steps are required (e.g. tip adjustment in a restaurant).
- The Processor forwards your settlement request to the appropriate credit card payment brand for confirmation with the cardholder's issuing bank.
- The payment brand receives the settlement request and does two things:
- Issues a credit to the Processor to reimburse you for the amount of the settled transaction. The issuer then pays the Processor for the transaction.
- Issues a debit to the issuer to charge for the settled transaction.
- The issuer then posts the transaction to the customer/cardholder's account. At the end of the billing period, the issuer sends the customer/cardholder his or her monthly statement.
- The cardholder receives his or her credit card statement and pays the bill (to the card issuer).
The Processor deposits money into your bank account to compensate you for transactions processed.
How Funding Works
The funding process is really an extension of settlement, and sometimes the terms "settlement," “batching,” and "funding" are used interchangeably regarding this process. Funding happens when the payment brands, such as Visa® or MasterCard®, reimburse the Processor for your customer transaction, allowing us to send these funds to you. Generally, you receive your funds within one to two business days. * Note that funding does not occur on weekends or on certain holidays, particularly federal banking holidays
We hope that this has provided a comprehensive look at the number of key players and actions required to process a credit card at your business. If you would like to learn more about how this process works for your individual business or how Merchant Warehouse can leverage our knowledge of this process to save you money, please fill out the form below or call us today.