What is credit card processing?
As a merchant, you rely on your credit card processor to handle all of the smallest details of accepting electronic payments. However, it's good to at least understand the basics before you start taking plastic. Credit card processing has evolved over the years as technology has continued to evolve, but the concept has stayed similar. So what is credit card processing exactly?
How credit card processing works
Here’s a brief refresher on how credit card processing works:
- The customer presents a payment card in your store.
- The card is swiped (magnetic stripe card) or inserted (EMV chip card) into your terminal.
- The transaction information is then sent off to the processor, who communicates with the customer’s bank and the card networks (such as Visa and MasterCard). Your processor transmits the processing data to the customer’s bank, so the charge can be either approved or denied—depending on if the card number is valid, whether the customer has the funds available and other factors.
- That approval is sent back through your processor and then finally back to your terminal.
- You will then send a batch of approved transactions for settlement (for example, at the end of each business day). At that point, your customers’ accounts will be charged and the transaction amounts (less processing, interchange and other fees) will be sent to your bank account.
Customers and merchants alike tend to take this technology for granted, so even short delays can cause big annoyances.
The challenge of processing thousands of transactions, quickly and safely
Making credit card processing increasingly more efficient and secure—while happening just as quickly—is an ongoing process. Card networks like Visa and MasterCard can now process countless transactions simultaneously in just seconds. There are a lot of moving parts, and the process can vary from merchant to merchant. Generally you will have what's known as an acquiring bank (your bank) and an issuing bank (your customer's bank). Both of these institutions will take fees when the card is run.
Fees you can expect to pay for credit card processing
Fee structures vary from card network to card network, and from bank to bank. For example, companies like American Express having a vastly different policy than Mastercard. The amount of fees you’ll pay on a given transaction depends on the type of card, whether or not it's a rewards card, the type of merchant you are and numerous other factors.
Typically, credit card fees can total up to 3% of the total transaction. A cut is taken out for both the authorization and settlement stages of the transaction. If something goes wrong during the course of the transaction—such as a denial or chargeback—the fees may increase or the transaction may be dropped altogether. You need to understand what each message means when dealing with credit card processing. Sometimes if there's a long line at your checkout counter, your cashier might push through a transaction from a card that is overdrawn or otherwise compromised. In such a case, you may never receive the funds for this transaction or the fees assessed will be astronomical. Having the right equipment—and the right processing partner—can make all the difference in your credit card processing.
Evolving technology for today’s sophisticated fraudsters
The large volume of sensitive information that businesses have to keep track of makes them vulnerable in the event of a breach in their credit card processing; card crime, including fraud, and its aftermath makes everyone's lives miserable. When a fraudulent transaction is made, it affects every party that's involved in credit card processing. Fraudsters are continually developing new technology and methods to steal sensitive data, so the best way to arm your business against attack is by choosing a credit card processor that takes data security seriously.