Credit Card Processing Basics

What you need to know about accepting credit and debit cards

Grow your business by accepting credit cards  

 

There are some clear advantages to accepting credit and debit card payments in your business. You give your customers the convenience of paying by mobile phone, by tablet, online, or in QuickBooks.  

 

To get the most out of accepting credit cards, take some time to learn more about who you’ll work with to process payments, how to get set up, how to avoid problems, what to look for in a processor, and how to keep your fees low.

Get to know the key players

 

Every time you accept a credit or debit card payment, several organizations work together to complete the transaction. The key players include:

 

1. Merchant bank: The financial institution that provides you with a merchant account. The merchant bank will handle credit card transactions to your bank account and charge a fee called a discount rate.  

 

2. Processors: Third parties that merchant banks may partner with to share their responsibilities. They’re authorized to set up merchant accounts, quote you a discount rate, and route credit card transactions to the right networks. They manage all the relationships between you and other players. The benefits to you may include better customer service and integrated business solutions (beyond just accepting credit cards). Processors are paid on a per transaction fee basis, which is included in your discount rate.  

 

3. Issuing bank or issuer: The financial institution that provides the credit card to the end user.

 

4. Card payment brand: Associations such as Visa, MasterCard, and American Express. They charge you an interchange fee, which they share with the issuing bank. Some brands such as American Express and Discover issue cards directly to consumers, without a bank intermediary.

Get started with credit card processing

 

Here’s how to get started accepting credit and debit cards:  

 

1. Choose your payment processing services provider. There are many processors in the market, so shop carefully. Read more below on what to look for in a provider. Note: QuickBooks Payments offers a complete payment processing solution for merchants.  

 

2. The processor will have you set up a merchant account based on your type of business.

 

3. Decide how you’ll accept credit cards: in QuickBooks, on mobile phones or tablets, or at the point of sale.  

 

4. As soon as you swipe the card, the information will be forwarded to your processor. You can either swipe the card or type card information into your payment processing system.

 

5. The processor will submit your request to the card payment brand, such as Visa® or MasterCard®.

 

6. The card payment brand will send your request to the bank that issued the card to the customer.

 

7. The issuer will approve or decline the transaction and send this response to the payment brand.

 

8. The payment brand will send the response to the processor.

 

9. The processor will forward the response to you (through the payment processing system, whether it’s mobile, website, online, or point of sale).

 

10. The card will be approved, declined, or referred for purchase. All of this takes just a few seconds to complete.

 

11. If the card is approved, you’ll deliver your products or services to your customer. Meanwhile, the issuing bank will send the money through the credit card network to your bank account (within 2-4 business days). Whether you use a credit card machine, QuickBooks, or a mobile credit card reader, every credit card transaction will follow these same basic steps.

Avoid common problems

 

You can save time and money and avoid costly mistakes by following these best practices:

 

1. Learn all the fees, charges, rules, and regulations in your merchant account agreement.

 

2. Check the identity and expiration date on any card you’re about to process.

 

3. Prevent duplicate transactions.

 

4. Don't put minimum or maximum limits on your transactions. Regulations state that you must accept credit cards for any size of transaction.

 

5. Don’t offset the cost of accepting credit cards by charging a usage fee for credit card transactions.

 

6. Don’t display full account numbers on your receipts. Each state’s laws regulate how much information can appear.

 

7. Get to know the fraud screening products and services that can help you.

 

8. Use the right accounts for your business. If you try to process Internet transactions with your retail merchant account, you may face steep fines and lose your merchant account.

 

9. Never run your personal credit card through your merchant account.

 

10. Don’t split a transaction into smaller transactions. This could put you at risk of a chargeback.

 

11. Prioritize customer issues above everything else.

Choose a payment processing service provider

 

Your payment processor can help you get much more out of accepting credit card payments. Here’s how to choose the right partner for your business:

 

1. Learn about all the fees associated with accepting credit cards, and find out whether there's a termination fee for switching providers.

 

2. Find a provider that will actively partner with you to get you started, support you when you run into problems, and help your business grow.

 

3. Be sure your payments solution will allow you to grow with use of point of sale, online credit card processing, and mobile credit card processing.

 

4. Look for a payment processing system that's integrated with your accounting software. This will save you time and reduce double entry. QuickBooks Payments is one such complete solution. It allows you to process and record a credit card transaction in one easy step.

Reducing credit card processing costs

 

Credit card processing fees can be complicated to sort out. When you’re shopping for a provider, be sure you understand all the fees and key factors involved. Read this page on tips for reducing your credit card processing costs.  

Important terms and definitions

 

Accepting credit cards will introduce you to many previously unfamiliar industry terms. To make sure you’re ready, get to know the following terms:

 

1. Authorization fee: For some transactions, the cardholder and card won’t be present. If you want to get the discount rate, you may need to verify the cardholder's address. Your processor will charge you a flat fee per transaction for this verification. The fee may be listed separately or bundled with your rate.

 

2. Card association: For any credit card brand, the card association is the network of issuing and acquiring banks that process it.

 

3. Chargebacks: Within 60 days of the statement date, the cardholder can dispute a charge. Their complaint will go to their issuing bank. Next, you’ll receive a retrieval request, for which you’ll pay $10 to $50. Respond promptly, or you could face an additional fee or lose the transaction completely. After a refund, you’ll often lose the interchange fee from the original transaction as well as the sale.

 

4. Downgrades: When one or more of your qualifying requirements have not been met and your risk exposure increases, you’ll face a downgrade. The higher your risk, the more you’ll pay the merchant service provider and other players to process that transaction. Much of the cost of accepting credit cards comes from transactions that don’t qualify for a discount because they don't meet certain regulations set by the card associations. Common reasons for a downgrade include not settling a transaction within 2 days of the initial authorization, missing or invalid data, corrupted swiped data, and the absence of address verification on manually keyed transactions.

 

5. Interchange fees: Most major card associations charge an interchange fee for processing each transaction. You’ll pay different fees depending on how the transaction is sent and what type of merchant account you have. Your interchange fee covers the cost of getting funds to your merchant bank and billing information to the issuing bank. It normally represents a percentage of the total transaction plus a flat fee.

 

6. Issuing bank: The issuing bank extends the line of credit to a consumer and offers you a payment card.

 

7. Merchant bank: Your merchant bank is the financial institution that provides you with a merchant account. It will also handle payment of all your credit card transactions and credit card processing.

 

8. Merchant service provider: Your merchant service provider makes sure your account is set up to handle credit card transactions on the front and back end. They’ll also serve as the intermediary for your communication with card associations, processors, and your bank. One example is QuickBooks Payments.  

 

9. Mid-qualified rate: You’ll pay a mid-qualified rate when you accept and process a card that doesn’t qualify for the lowest rate. This may happen when you manually key a card into a terminal instead of swiping it, or when a rewards or business card is being used. See rates, qualified rate, non-qualified rate.

 

10. Non-qualified rate: You’ll pay a non-qualified rate any time you accept and process a card that doesn’t qualify for either of the lower rates. This may happen when you manually key a card into a terminal instead of swiping it. You may also pay this rate when address verification isn’t performed, information is missing, or the authorization isn’t settled within 48 hours. See rates, qualified rate, and mid-qualified rate.

 

11. Payment gateways: Your payment gateway transmits payment data from you to card associations and credit card processing companies. Payment gateways support most point-of-sale systems, banks, processors, and merchant types.

 

12. Processors: There are two types of processors. A front-end processor handles up-front card authorization, connectivity to card associations, and network authorization. A back-end processor receives and forwards settlement batches to the issuing banks on a regular schedule.

 

13. Qualified rate: The qualified rate is typically the lowest rate you’ll receive. It’s the percentage that’s charged whenever you process a card transaction through an approved processing solution. See rates, mid-qualified rate, non-qualified rate.

 

14. Rates: The rates you pay cover transaction processing and the depositing of funds into your account. You’ll often pay a combined rate based on a percentage of the sale plus a flat fee per transaction. This rate may bundle the fees of your merchant service provider, processor, issuing bank, and card association. Your interchange fee is fixed, but you can try to negotiate for lower communication and processing fees to reduce your rate.


You’ll pay different rates depending on how each transaction was processed. Swiping a card in person will often give you the lowest rate. Contain your costs by processing your transactions at the qualified rate whenever possible. See qualified rate, mid-qualified rate, non-qualified rate.