Credit Card Processing – A Detailed Guide

Credit Card Processing

When you hear the term “credit card processing,” this usually refers to the merchant services that enable businesses to accept credit card payments. Credit card processing companies provide businesses with the ability to process credit card payments either in-person or online.

Businesses that accept credit cards as a form of payment must use a credit card processor. When a customer pays with a credit card, the credit card processor will work to ensure that the funds are transferred from the customer’s account to the merchant’s account.

There are several different types of credit card processors, and each has its own benefits and drawbacks. The three most common types of credit card processors are banks, independent sales organizations (ISOs), and merchant service providers (MSPs).

Banks are the most traditional type of credit card processor. When you use a bank as your credit card processor, you’re typically working with a large institution that has a lot of experience processing payments. However, banks can also be more expensive than other types of processors.

Independent sales organizations (ISOs) are another type of credit card processor. ISOs typically work with multiple banks and can offer more competitive rates than a single bank. However, ISOs may not have the same level of customer service or support as a larger bank.

Benefits of Credit Card Processing

There are a number of benefits that come with credit card processing. Perhaps the most obvious benefit is that it allows businesses to accept credit card payments. This can be a huge advantage, especially for businesses that do a lot of online sales. Credit card processing also helps businesses to avoid the hassle and expense of dealing with bounced checks or returned payments.

Another benefit of credit card processing is that it can help businesses to increase their sales. Studies have shown that customers are more likely to spend more money when they can pay with a credit card. This is because paying with a credit card is more convenient than other methods of payment, such as cash or check.

Credit card processing can also help businesses to build their customer base. Customers who can pay with a credit card are more likely to be repeat customers than those who can only pay with cash or check. This is because it’s easier for customers to use a credit card than it is to keep track of cash or checks.

Last, but not least, credit card processing can help businesses to better manage their cash flow. When businesses accept credit card payments, they can typically access their funds more quickly than if they were waiting for customers to pay with cash or check. This can be a huge advantage, especially for businesses that have a lot of expenses.

Types of Credit Card Transactions

There are two types of credit card transactions: authorization and settlement.

Authorization is the first step in processing a credit card payment. When a customer swipes their card, the credit card processor will send an authorization request to the card issuer. The card issuer will then review the request and either approve or decline the transaction. If the transaction is approved, the card issuer will send an authorization code to the processor. The processor will then send the code to the merchant, and the transaction will be complete.

Settlement is the second step in processing a credit card payment. After a transaction is authorized, it will typically take 1-2 days for it to settle. During this time, the funds will be transferred from the customer’s account to the merchant’s account. Once the transaction is settled, the merchant will receive a settlement statement from the processor.

Credit Card Processing Fees

Credit card processing fees can vary depending on the type of credit card processor you use. Typically, banks and ISOs charge higher fees than MSPs. Merchant service providers typically offer more competitive rates because they work with multiple banks and can offer bulk discounts.

When you’re shopping for a credit card processor, it’s important to compare fees so you can find the best deal. Here are some of the most common fees you’ll see:

  • Interchange Fees: These are the fees charged by the card issuer. They are typically around 1-2% of the transaction amount.
  • Assessment Fees: These are fees charged by the card associations, such as Visa or Mastercard. They are typically around 0.1% of the transaction amount.
  • Transaction Fees: These are fees charged by the credit card processor for each transaction. They are typically around 0.05-0.10% of the transaction amount.
  • Discount Rate: This is the fee charged by the credit card processor for each transaction. It is typically a percentage of the total transaction amount, plus a flat fee.
  • Monthly Fees: These are fees charged by the credit card processor on a monthly basis. They can vary depending on the type of account you have.
  • Equipment Fees: These are fees charged for renting or purchasing credit card processing equipment.
  • Setup Fees: These are one-time fees charged by the credit card processor to set up your account.

As you can see, there are a lot of fees associated with credit card processing. However, these fees are typically worth it for businesses because of the many benefits they offer.