Introduction:
Credit card processing is the backbone of any retail business. It is the process that allows customers to pay for your products through various payment options such as credit cards or mobile payments.
While consumers use various and more methods to pay for goods and services, especially through rapidly growing wireless payments, small business owners face challenges in understanding how the process works.
Taking payment from the customer requires directing your business’s transaction through several parties, many of which impose various fees for their services.
What is Credit Card Processing?
Credit card processing refers to the system used to complete payments made by credit cards online, in person, over the phone, or by mail. It is a critical part of retail because it ensures that customers can complete their purchase quickly and easily.
The process seems simple in theory. Customers swipe their cards, and you get your money, right? But there are many parties involved in collecting payments at your point of sale:
- Cardholder: the person making the payment.
- Merchant: the company selling a service or product.
- Acquiring Bank: also known as the Merchant Bank, is the account that allows your business to take money from payments.
- Payment Gateways: services that connect to credit card companies to facilitate payment acceptance. They also allow your customer to use their preferred payment method. The payment gateway collects the payment details from the transaction and routes the information to the payment processor or the acquiring bank.
- Payment Processor: the system that connects the merchant, card network, and cardholder’s bank.
- Issuing Bank: the bank that determines whether the cardholder can fund the transaction. If approved, the funds are released for payment.
- Card Associations: also known as credit card networks, which are responsible for setting interchange fees and compliance standards.
How Credit Card Processing Works
The credit card processing process occurs in a matter of seconds. It’s astounding when considering the steps that have to be taken to settle the payment from your store:
- The customer pays for the order.
- The payment is sent to the processor.
- The bank either approves (or declines) the transaction.
- The approval is sent back to the processor.
- The payment is settled.
Customers swipe their credit card on the terminal. Then their banking information is shared with the merchant. People can make payments in person in various ways including:
- Swiping a magnetic card.
- EMV chip card.
- Contactless card.
- Using digital wallets like Apple Pay or Google Pay.
If the customer is online, they can pay through your website or apps via payment gateways, which is technology that captures and transmits payment data from the customer to their bank. The payment is sent to the processor.
Once the customer makes the payment, their payment information is sent to the processor. The processor communicates with the customer’s bank through their card networks such as Mastercard, Visa, Discover, and American Express. The bank approves (or declines) the transaction.
The cardholder’s bank then determines whether they have enough funds to cover the transaction. It may also perform a security check to see if the transaction is fraudulent.
The bank’s decision is sent to the payment processor, which relays it back to your terminal or credit card reader to inform you whether the cardholder was approved or not.
Approved transactions are settled at the end of the business day. Once settled, the transaction amount is deducted from the customer’s account, and the money is deposited into your bank account.
Typical Credit Card Processing Fees
Each time a business processes a credit card transaction, it pays three main fees: interchange fees, service fees, and processing fees. These fees make up the total payment fees.
You will want
In understanding these fees when choosing a payment processor. Each processor varies in the amounts they charge, which affects your business’s net profits.
Exchange Fees
When a merchant processes a credit or debit card payment, card networks impose exchange fees. These are standard, non-negotiable fees collected by the card networks but paid to the cardholder’s bank.
Card networks like Visa and Mastercard facilitate the process of paying with credit cards. For this service, they collect exchange fees. These fees represent the majority of the total payment fees.
The average exchange fee for credit card payments is about 1.8%, while the exchange fee for debit cards is 0.03%. The actual fees you pay vary depending on the type of card. For example, premium cards like the American Express Black are higher than a standard debit card from a local bank.
Service Fees
Service fees (or network fees or assessment fees) are paid to the card networks. These are non-negotiable fees that vary by card network and card type.
Base assessment fees range from 0.1% to 0.15% of the transaction. However, the brand fee can change depending on factors like:
- The cardholder’s country.
- The merchant’s location.
- The currency.
- The type of card.
Processing Fees
Payment processing companies and their subsidiaries charge processing fees. These are the only negotiable fees among all your payment processing fees.
They cover various different fees, including acquisition, processing, and gateway fees. You can negotiate based on the number of transactions, refund volumes, and the industry. Discuss your options when talking to a sales representative from a potential payment processing company.
Pricing Structures for Credit Card Processing
Payment processing companies use a range of pricing models. Here are four common types:
Fixed Rate
The fixed rate pricing model is popular for accepting credit cards. In this model, the company charges you based on a fixed percentage of volume. You pay one fee for all credit and debit card transactions. Rates are quoted as a simple base rate, like 2.75%. It may also include an amount per transaction, like 2.75% + between $0.20 and $0.30 per transaction.
Payment processors charge fees based on the transaction type. For example, in-store transactions (such as in-store payment) have a lower rate than card-not-present transactions (online payment) because they are less risky.
Actual Cost
The actual cost pricing model is used to determine the cost of the transaction to merchants. It consists of two components:
- The interchange rate set by the card network.
- A mark-up set by the payment processor itself.
This model is considered one of the fairest and most balanced models used in the industry due to its transparency. The actual cost model typically costs businesses around 2.2% + $0.22 per transaction on average.
If you sign up with a processor using this model, you will see your costs vary depending on the types of cards each customer uses. For example, a processed debit Mastercard may have an interchange rate of 1.05% + $0.15. A Visa Rewards Signature card will cost your business more, at around 2.3% + $0.10.
The more premium the card, the higher the interchange rate.
Subscription
The fixed-rate subscription model is one where the payment processing company charges a flat fee rather than a percentage of sales.
What distinguishes it from the actual cost model is that the mark-up is applied as a fixed monthly fee and a fixed fee per transaction instead of a percentage of sales volume.
The business only pays exchange fees and a fixed monthly or annual fee to the processor. This model can be cost-effective for new and growing retail businesses.
Tiered
The tiered pricing model charges fees based on the type of card the customer uses. It allows processors to group interchange fees into tiered pricing levels of their choice. It is opaque and costly and contains hidden fees that you may not want to pay.
There are
for providers that offer robust security measures, such as encryption and tokenization, to protect sensitive customer information during transactions.
Customer Support
Good customer support is crucial when selecting a credit card processor. You may encounter issues or have questions during high transaction periods, and having access to a reliable support team can make a significant difference.
Inquire about the availability of customer support. Do they offer 24/7 support? What channels are available for contacting support (e.g., phone, email, chat)? A company that prioritizes customer service will help you resolve issues quickly and efficiently.
By considering these factors, you can select a credit card processor that meets your business needs and provides a seamless payment experience for your customers.
About a processor covering:
- EMV chip readers. They help prevent counterfeit cards in-store. They use dynamic encryption that makes transactions unique. If you do not have an EMV chip reader, you could be liable for any fraudulent charges.
- PCI compliance. The Payment Card Industry Data Security Standards (PCI DSS) provide guidelines for merchants on how to secure customer data and avoid payment fraud. Compliance with PCI standards is important to protect your customers and your business from risks.
- Tokenization. When accepting payments online, you should not store customer data on your server. A good payment processor ensures that card information does not touch your server or any other unsecured files using tokenization, a process that encrypts data before storing it on external servers.
- Smartphone processing. With the rapid rise of mobile payment options like Apple Pay and Samsung Pay, having a system equipped to process mobile wallets becomes essential. These mobile options are also becoming increasingly popular due to their convenience, along with additional security benefits.
Customer support
What happens when you encounter a problem with your credit card device? Or have questions about your billing data? Work with a payment processor that offers 24/7 business services and can help you solve issues. They should also be able to explain any fees you do not understand.
Credit Card Processing Devices
Small business owners’ payment preferences have changed recently, and there has been significant growth in markets like wireless payments and local delivery. People are focused on reducing contact without sacrificing convenience and speed.
Let’s take a look at the devices you will need to process payments quickly and securely.
Point of Sale (POS)
It’s no secret that a reliable point of sale system is the backbone of your back office. A good POS will provide you with all the tools you need to manage your business and accept payments anywhere, all in one place.
With Shopify’s point of sale, you get access to our POS app, which allows you to accept popular payments. It also comes with a retail stand for your iPad, allowing you to flip or detach your iPad from its base to display customer orders or assist them in-store.
One of the best things we’ve discovered is that every staff member on the ground now gets a mobile device to easily use Shopify POS for orders and even check things like inventory and availability. Matthew Adams, General Manager, Super Retail
With an integrated POS like Shopify POS, you can also offer competitive card rates from Shopify Payments. You get a one-year guarantee on Shopify POS devices and 24/7 support to ensure that the checkout process is smooth for shoppers at all times, regardless of where the sale takes place.
Wireless Payments
Instead of swiping cards and paying with cash, consumer preferences are shifting toward digital wallets. Not only are consumers enthusiastic about these changes, but over 80% of merchants also say that wireless payments keep their checkout areas clean and stores safer. As a small business owner, accepting wireless payments is essential to meet modern consumer demand.
Visa found that the use of wireless payments in the United States increased by 150% from March 2019 to March 2020. Total revenue generated from wireless payment methods in the United States alone is expected to reach $358 billion by 2025.
A wireless payment is a payment process that is done by tapping a device like a smartphone or contactless card on a point of sale terminal. It is placed in the proximity of your POS system. When a wireless connection is established, the payment processing begins.
Wireless payments are considered
Wireless payments are more secure. Compared to the magnetic strip on chip and PIN cards, hackers cannot copy customer data onto another card. This payment method also provides a faster and easier checkout process for customers.
The spread of wireless payments is not limited to the UK. According to the American Express Digital Payments Survey 2020, 58% of consumers who used wireless payment options said they were more likely to use them after the pandemic compared to before. Furthermore, 50% claimed that using wireless payment methods is safer for their health than paying with cash or swiping or inserting a credit card.
Credit Card Readers
Small business owners are mobile these days. If you sell at a farmers market or local event, you may find that most people are no longer willing to pay in cash. This is where credit card readers come into play.
A credit card reader decodes personal and financial information from your customer’s magnetic strip, chip, or mobile phone. Merchants use it to accept payments via credit card, debit card, or any other payment method.
Credit card readers usually come with your point of sale. Shopify POS offers a credit card reader and EMV chip reader for accepting chip payments at the counter or wirelessly outdoors. It also comes with a dock to keep the credit card reader and chip reader charged for a smooth and secure checkout process.
Start Processing Credit Cards in Your Store
There is no doubt that a good credit card processor can impact your business. From accepting your preferred payment options to providing a quick checkout process for customers, it is essential to work with a reputable company for your retail business.
With the rise in popularity of alternative payments, merchants can win over shoppers by providing various payment options with Shopify POS. Start your free 3-day trial with Shopify – no credit card required! Email addressStart the free trial
Frequently Asked Questions About Credit Card Processing
What are the duties of a credit card processor?
Ensuring that all credit card transactions are processed accurately and securely. Responsible for monitoring and analyzing daily credit card transaction activity. Reviewing customer information for accuracy and validating credit card information. Establishing credit limits and reviewing credit card applications. Ensuring compliance with all applicable laws and regulations in credit card processing. Helping to prevent fraud. Monitoring credit limits and updating customer records. Resolving customer inquiries and disputes. Maintaining detailed records of credit card transactions. Balancing credit card accounts.
How does a credit card processor make money?
A credit card processor earns money by charging merchants for processing credit card payments. The fees they charge include interchange fees, which are set by credit card networks and are a percentage of the total transaction amount, and flat fees, which are a fixed amount charged per transaction. In addition, many processors also charge monthly fees, setup fees, and early termination fees.
What are merchant credit card processing services?
Merchant credit card processing services are services provided by companies for businesses to accept payments from customers using credit and debit cards. This service is provided by a merchant account provider, which is a company specializing in processing card payments. The merchant account provider will supply the necessary hardware and software to process payments, along with customer service and fraud prevention measures.
How much do credit card processing agents make?
The amounts earned by credit card processing agents vary based on their experience, the types of clients they work with, and the services they provide. Generally, experienced agents can expect to earn
Source: https://www.shopify.com/retail/credit-card-processing
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