And What Do They Do For Me Anyway?
But, what you probably have wondered at least once in your life as a business owner is why you have to pay so much, or why it is hard to get approved for a merchant account to accept credit card payments?
Most merchants don’t realized that credit card processing is a pretty complex process involving a multitude of entities that all have to come together through the proper lines of communication, under rigorous security protocols, and assume significant risk in order to provide you with the end result: accepting the payment, in whichever form the customer prefers to use.
While you don’t have to become an expert in the ins and outs of credit card processing to get a merchant account it is important to understand the basics of processing in order to not only get the best rates possible for accepting credit cards and payments in your business, but also to recognize when you find an honest credit card processor and when you are being taken advantage of.
That being said, the goal of today’s article will be to make an effort to give you a birds eye view of the process of accepting payments including what a credit card processor does while also keeping it short and sweet.
How does credit card processing work?
Of course, it all begins with you and your customer. You are each the beginning and the end of the full circle of accepting payments.
Obviously, the whole process starts when your customer wants to purchase an item from you, so they pull out their credit card and dip the chip into your EMV compatible terminal and you sell them the product. But what is actually happening with that information? You may be surprised how many more players are involved in the game. Aside from the merchant and the consumer, there is also the card issuing bank, the acquiring bank, the card network, and of course the processor.
Consumer’s bank-card issuing bank.
The consumer’s bank is not their personal bank account as it might seem (unless they are using an ATM card, but that’s another article). This refers to the credit issuing bank, the bank that issued the Visa or MasterCard credit card to your customer. When a transaction requesting payment is received they will either approve or deny the request based on the customers funds or credit worthiness. They are also responsible for releasing the funds once the transaction has been settled.
Merchant bank or acquiring bank.
In order for a merchant to take any kind of payment other than cash they must first have a merchant account. The acquiring bank is the bank that issues the business owner a merchant account. This is the bank that backs a merchant’s credit card transactions and is ultimately responsible for depositing the funds from those credit card sales into the business bank account.
One might be tempted to think that when a customer purchases an item from a business that the credit card issuing bank sends the payment to the merchant and that is the extent of it, but there is actually a whole myriad of middlemen touching all of the data and funds in between.
The acquiring bank (or processor) is actually the entity that funds the merchant for the purchase. They are basically fronting the money to the merchant. This inherent risk that comes with loaning the business money is why you have to “apply” for and be approved for a merchant account. It’s much like applying for a loan. Once the processor or acquiring bank has funded the merchants account for the sales, they then must request reimbursed from the card issuing bank, who then waits for the customer to pay them back.
The processor is the entity that facilitates access to the card network to enable the communication of the payment information from one party to another and back again for approval. The processor provides the merchant with a terminal or gateway, the hardware and software needed to facilitate the payment information pathway. The payment information gathered, as well as the information pertaining to the merchant requesting payment, is collected by the terminal or gateway and then sent over the card network to the customers bank. Once the customer’s bank either approves or denies the purchase it will reverse order and the information is sent back through the pathway to the merchant. Because all payment data must adhere to strict security rules set by the Payment Card Industry Data Security Standard (PCI DSS) the processor is the one responsible for making sure that all of these protocols are followed. The Processor will charge a fee for their services, this fee is generally added on to the base fees (interchange) set by the card network. This type of pricing structure is usually referred to as “interchange plus” pricing because the processor starts with the fees passed through to the merchant by the card network( interchange) and then adds their fee(plus). The processor fee is expressed as a basis point. One basis point is equivalent to 0.01% (1/100th of a percent) or 0.0001 in decimal form.
Who, or what then, is the card network?
Visa, MasterCard and Discover are “the network”. Now that we know the credit cards are actually issued by various banks, such as Chase, and not Visa or MasterCard, let’s talk about what they are responsible for in this whole payments game. These entities are the card associations that essentially govern the members of the network, including all guidelines for qualification. They established and maintain the interchange network in order to act as the mediator between the merchant’s acquiring bank and the customer’s card issuing bank. They are also who set the fees associated with using the interchange to transfer the payment transaction data back and forth. The fees associated with interchange are set by the card network and will generally make up the majority of the total fees associated with accepting credit cards.
Now that you understand the basics of how credit card processing works and just how many players have a hand in making sure that everything runs smoothly you realize how important it is to choose a processor who takes their position seriously. Since you do not have a choice when it comes to the issuing bank or the card network, the only thing you do have control over is which processor you choose to use to make sure you are provided the best options for your merchant account with the most competitive price and one who will provide you with first rate customer service. It is imperative to do a bit of research before just going with the person promising you the lowest price so you don’t make a mistake when choosing your merchant service provider.
A top of the line processor or MSP (merchant service provider) will not only demonstrate a broad understanding of the payments industry regulations through extensive experience, but will also strive to build strategic partnerships in order to create a reliable network of options for their clients.
Bankcard Brokers boasts a staff of ETA Certified Payments Professionals who hold themselves to the highest level of professionalism and personal integrity together with providing clients with reliable payment solutions with complete transparency.
This dedication to customer service will be the bridge that allows you, the merchant, to not only successfully conduct business on a day to day basis but focus on building and growing your business while keeping abreast of advancements in the payments industry that will help you to remain relevant in the marketplace.