Credit Card Processing 101
Credit where credit is due
In today’s competitive marketplace, accepting credit and debit cards is no longer a luxury. The convenience it offers customers can make all the difference between making the sale and losing it to one of your card-accepting competitors. Credit cards not only increase the consumer’s buying power and impulse purchasing, but also often result in a higher average sale amount than is typically seen with cash.
Despite the obvious advantages to your bottom line, accepting credit cards brings with it a number of fees, regulations, and requirements. Educating yourself on industry terms, the credit card process, and how to best navigate the players, fees, and services involved will save you time, money, and a lot of headaches down the road.
Industry terms you need to know
Accepting credit cards brings a whole new list of industry terms that you may not have known existed. Be sure to familiarize yourself with the following vocabulary before you begin talking to vendors.
Other than American Express and Discover, major card associations charge an interchange fee for processing each transaction. The fee is based on how the transaction is sent and the type of merchant account you have. Usually stated as a percentage of the total bill plus a flat cost per transaction, this fee covers the costs and time associated with getting funds to your merchant bank and the billing information to the issuing bank.
The rate is the primary cost you’ll pay for the processing of a transaction and the depositing of the funds into your account. Merchant service providers will often bundle their fees with those of the processor, issuing bank, and card associations into a combined rate based upon a percentage of the sale plus an additional flat fee per transaction. While the interchange fee will always remain the same, you may be able to negotiate on some of the hidden communication and processing fees involved in credit card processing to get a lower rate.
The rate charged for each transaction depends on how it was processed – in person, online, or by phone. Transactions done in person where the actual card is swiped will generally qualify you for the lowest rate. To keep your costs low, process your transactions at the qualified rate whenever possible.
Qualified rate is the percentage that’s charged whenever a merchant accepts and processes a transaction with the card present, using an approved processing solution. This is usually the lowest rate you can receive, and often the one quoted to a merchant inquiring about rates.
Mid-qualified rate is the percentage that’s charged whenever a merchant accepts and processes a card that does not qualify for the lowest rate. This may happen when a card is manually keyed into a terminal instead of being swiped or when a rewards or business card is being used.
Non-qualified rate is the percentage that’s charged whenever a merchant accepts and processes a card that does not qualify for either of the lower rates. This may happen when a card is manually keyed into a terminal versus being swiped, address verification isn’t performed, information is missing, or the authorization is not settled within the allotted time frame (usually 48 hours).
A downgrade occurs when one or more of your qualifying requirements has not been met, thus increasing your risk exposure. The higher the risk, the more you will have to pay to the merchant service provider and the other players to process that particular transaction. A large portion of the costs associated with accepting credit cards stems from the transactions that do not qualify for a discount because they don't meet the data content or transmission timing regulations set out by the card associations. Some of the more common reasons for a downgrade include not settling the transaction within 2 days of your initial authorization, missing or invalid data, corrupted swiped data, and the absence of address verification on manually keyed transactions.
The cardholder has up to 60 days from the statement date to dispute a charge. When the cardholder files a complaint with the issuing bank, you will receive a retrieval request, which can cost you from $10 to $50. If you do not respond in what your provider deems a timely manner, you may also be charged a timeliness fee or lose the transaction completely. When a refund is issued, you will often lose the interchange fee you paid on the original transaction as well as the sale.
For transactions where the cardholder and card are not present, you may be required to verify the cardholder's address to qualify for the discount rate. All processors charge a flat fee per transaction for this verification that is either listed separately or bundled with your rate.
Who's who and what's what
A credit card transaction involves a number of participants from swipe to payment, all of whom benefit from the transaction fees you pay.
The following diagram depicts the credit card process from start to finish and outlines the players involved.
Merchant Service Provider
A merchant service provider acts as a median for all communication and relationships between the merchant and the card associations, processors, and merchant bank. Often viewed as an extended sales force for the issuing bank, merchant service providers are responsible for setting up your account on the front and back end to handle credit card transactions.
Acting as the front-end connection to the card associations, payment gateways transfer payment data from the merchant to the issuing bank or processor as required. These gateways support most point-of-sale systems, banks, processors, and merchant types.
Processors handle the transmission of payment data that's necessary to authorize and settle credit card transactions. Front-end processors deal with up-front card authorization, connectivity to card associations, and network authorization, while the back-end processor receives and forwards settlement batches to the issuing banks on a scheduled time frame. Processors charge you a fee for each transaction, which is usually bundled with your rate.
The issuing bank extends a line of credit to the consumer. The issuing bank and acquiring bank share liability for non-payment by the merchant, according to the rules established by the card association brand.
The card association is a network of issuing banks and acquiring banks that process payment cards of a specific credit card brand.
Also known as the acquirer or the acquiring bank, the merchant bank is the financial institution that provides you with a merchant account, and handles acceptance and payment of all credit card transactions at the quoted rate. For every transaction you make, a portion of your rate is paid to the issuing bank and card association on your behalf.
Do’s and Don’ts
There are a few things that you need to be aware of when beginning to accept credit cards. Below is a list of do's and don'ts that can help protect you from losing your merchant account and/or being fined.
Don't run your personal credit card through your own merchant account or use it to provide cash to yourself or a friend.
Don't place minimum or maximum limits on your transactions. Regulations stipulate that if you are going to accept credit cards, you must accept them for any transaction.
Don't charge any sort of usage fee for credit card transactions to offset the cost of accepting credit cards.
Don't split a transaction into smaller transactions. You may open yourself up to a chargeback.
Don't request a credit card to guarantee a check.
Verify the identity and expiration date on the card.
Truncate the account numbers on your receipts. Each state has its own laws governing what can and cannot appear on the receipt.
Take every measure possible to prevent duplicate transactions.
Read your merchant agreement. It outlines all the various fees and charges, as well as specific rules and regulations that you need to be aware of.
Make resolving customer issues a priority.
Take advantage of the variety of fraud screening products and services available to merchants.
Ensure that old merchant accounts are properly closed and terminated.
Maintain the proper account for your business. Trying to process Internet transactions with your retail merchant account can lead to serious fines and even the loss of your merchant account.