North American Bancard Blog

A credit card processing guide

Posted by Nancy Bakanowicz on

credit card processingIn this day and age, with the marketplace more competitive than ever, not accepting credit and debit cards is simply not an option. Credit cards don’t just increase the consumer’s buying power, but it raises the likelihood of impulse purchases and higher average sales, but it can also increase your bottom line.

Accepting credit cards isn’t as simple as having a POS that accepts them – there are a number of fees, regulations and requirements that go along with accepting credit cards that can be confusing and almost seem like a foreign language at times. But it is important to learn about the process, the fees and the requirements – this knowledge will not only make you a better educated merchant, but could save you time and money in the future. Let’s take a look at some of the major steps in credit card processing:

The transaction. Transactions follow a specific path, which begins when the consumer presents a payment card to a merchant to pay for her purchase:

  • The card data is entered into the merchant’s POS, then sent to an acquirer/payment processor, whose job it is to route the data through the payments system for processing.
  • The data is then sent to the card brand (Visa, MasterCard, etc.), which forwards it to the issuing bank/processor, where the card is verified.
  • As long as the card is legitimate, hasn’t been reported lost or stolen, and has enough credit/funds in the account, the issuing bank/processor authorizes the transaction and sends an authorization number back to the card brand.
  • The issuing bank agrees to fund the customer’s purchase.
  • The card brand sends the authorization code to the acquirer/processor, who then sends the code to the merchant.
  • The sale is complete.

All of the above happens in seconds. Think of how long it takes from the time you give your credit card to a merchant for payment until you are walking away from the wrapstand with your purchase – that is all the time it takes.

Interchange fees. These fees are usually the largest component of the discount fee (see below). The interchange fee amounts are set by the payment brands, charged to the acquiring banks and paid to the issuing banks. There are two parts to an interchange fee – a percentage of the transaction and a flat fee. The amount charged depends on which network and what type of card are used, how the payment is made (in-store, internet, etc.), the size of the merchant, the location, etc.

Discount fees. No, discount fees are not discounts in the traditional, 25-percent-off-sale sense. Discount fees are charged to merchants by the acquirers and include the interchange fee. They are often negotiated and charged, and may be bundled. Other fees included in the discount fee may include acquirer fees for processing services, payment-brand assessments, network access fees and fees charged by payment brands to settle transactions.

Chargebacks. These occur when a cardholder files a complaint with the issuing bank, generally because of a fraudulent transaction, a customer dispute or a technical error. Chargebacks protect customers but merchants have the right to dispute a chargeback with the help of their acquiring bank or processor. It’s always best to respond to chargebacks in a timely manner or you could be charged a late fee or have the chargeback go against you. If the ruling is in the customer’s favor, you will likely lose the interchange fee you paid on the transaction as well as the amount of the sale and the goods purchased by the customer.

Compliance. Originally created by Visa and MasterCard to protect cardholder data and reduce data theft, the Payment Cardholder Industry Data Security Standard (PCI DSS, sometimes just PCI) sets the security standards for any organization that deals with payment card data. Compliance with PCI DSS is enforced by the payment card brands, including Visa, MasterCard, Discover and American Express. The requirements state, among other things, that transaction information must be safeguarded according to stringent guidelines. Compliance helps reduce data theft, helping merchants to protect customers and themselves, as well.

There is a lot more to credit card processing than simply swiping a card at a POS terminal, and while there may be several steps and they might seem complicated, the whole process is orderly and ensures that all rules and regulations regarding card transactions are followed. The next time you’re out shopping or you accept a customer’s payment card, think about everything that goes into ensuring the transaction is safe, secure and timely. That quick swipe or dip represents a lot of people working behind the scenes to ensure everyone gets paid.

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