Understanding Credit Card Processing
The underlying mechanisms of credit card processing (often called payment processing) involve presenting the details of the card and the transaction to the acquiring bank. However, there are different methods of processing this information.
Credit Card Processing Terminals
To process a card the chip and pin is inserted into a card reader, the magnetic strip on the back of the card is swiped, or the relevant card details are entered manually by the merchant through the terminal’s keypad.
The terminal then sends these details to the acquiring bank, allowing the transaction to be processed and approved.
Read the following to learn more:
What is a Merchant Account?
Merchant accounts are a form of bank account which allows a business to accept and process card payments. However, merchant accounts offer additional services which aren’t available with a private bank account.
Merchant accounts can be operated by banks, the credit card issuer (e.g. American Express) or other financial companies including Paypal and Worldpay.
Merchant Account Types
Merchant account providers can usually offer you several different kinds of account, depending on the nature and size of your business.
Small companies only need a basic merchant account with low setup costs and a limited range of services. However, if the nature of your business is considered riskier (e.g. firearms), you may need an alternative account with higher costs.
Such an account might also have different terms and conditions. The merchant account provider needs to be sure that any risk to their own company is minimized, so they charge higher fees to cover this.
Online and Brick and Mortar Merchant Accounts
Some merchant account providers cater for both e-commerce sites and ‘brick and mortar’ stores. For example, credit cards issued by MasterCard, Visa, American Express and Discover can be used for both face to face transactions and online payments.
Other financial companies such as GoDaddy, Paypal and Worldpay typically only provide merchant accounts to online traders.
Merchant Account Fees
Fees for merchant account services can be charged in different ways. Some providers charge a percentage of each transaction amount, with no further monthly fees or transaction fees.
Other providers allow traders to opt for a flat fee account with a fixed monthly payment and no further fees.
The scale of charges can vary according to the type of account or the total sum of transaction amounts.
Merchant Accounts and Credit Cards
A merchant account allows you to accept credit card payments safe in the knowledge that all necessary security checks are complete. This prevents fraudulent transactions and ensures your customer data is secure. A merchant account will:
- Manage credit card processing safely and securely
- Carry out checks against potential fraud
- Facilitate the rapid deposit of the funds into your own account
A reputable merchant account provider will have a gateway that meets Payment Card Industry (PCI) Data Security Standards. This means that their systems match the industry security standards for ensuring that confidential shopper information is protected during the transaction process.
What are the Benefits of a Merchant Account?
Aside from inspiring customer confidence by accepting major credit cards, there are a number of benefits to having a merchant account:
- Swift and smooth deposit of funds into your receiving account.
- Easy payment from your transactions.
- Option to set up recurring payments (e.g. weekly, monthly or annually), useful for subscriptions, or payment by installments for customers.
- Online banking makes it easy to access your financial information quickly.
- Track transactions and see disputed information promptly so you can respond quickly to any charge-back (refund) issues.
- Online banking collates all information for you across multiple premises.
- Email or SMS alerts allow you to react quickly to problems and avoid missing important deadlines.
- Alerts allow communication with customers, for example automated emails before collecting a recurring payment.
- Merchant account security features reduce the likelihood of charge-back or fraud.
- Address Verification Service (AVS) will ensure your cardholder is a genuine customer.
- You also have the option to block individual cards, IP addresses or Class C addresses if you choose.
Managing Credit Card Processing
There are several steps involved in credit card processing:
Your website shopping cart collects the following transaction information:
- Transaction amount
- Card number
- Customer verification value (CVV) number
This information is sent to the payment gateway which then encrypts the data for security and communicates this information to the card issuer.
The card data is screened for fraud and the transaction is either authorized or declined. The data is then returned to your merchant account. If the transaction is declined, the cardholder must find another way to pay.
If the transaction is authorized, it is processed and the funds are deposited into your account. Most of these steps are automated, especially in online transactions. A record is also kept for the purposes of accounting.
What are the Eligibility Criteria for Opening a Merchant Account?
Criteria varies among providers but there are some general requirements all reputable providers have in common:
- You must have registered your business and if it’s online, you will also need to provide a physical address.
- You may be required to display product information, prices, shipping methods etc. on your website to prove you are a bona fide business.
- You will need a secure shopping cart to protect customer details during transactions.
- You will probably be subject to credit (and other) checks to ensure your creditworthiness.
If you work in riskier businesses or have a bad credit history you may have to opt for a high risk merchant account. If you can’t get one of those you may also to wish to look into 3rd Party Credit Card Processing.
How Long Will It Take to Set Up a Merchant Account?
The time frame for setting up a merchant account varies depending on the account provider and the kind of account you need.
You will need to make an application (usually online) and you will be required to supply information such as your social security number, your tax ID number, your driver’s license number and your contact details.
You must also supply business location information, bank routing and the account number of the checking account of your business.
It will take some time for the provider to run all the necessary checks before your account can be authorized, so there will be a delay before your account is up and running.
A simple merchant account is likely to be set up within 5-7 business days, but others could take longer, especially if your business carries additional risk.
International merchant accounts can take as long as four weeks to become operational.
How Much will a Merchant Account Cost?
The cost of a merchant account depends on many factors, including the kind of account and size of your business. Costs may include an application fee, a transaction fee and a monthly fee for use of the account.
A discount rate is also charged – this amount is calculated as a percentage of the transaction amount.
There are many merchant account providers who may charge various rates, but the following should provide a rough guide to possible prices.
An alternative method of processing credit card payments is online through a payment gateway.
Payment gateways typically employ the services of third party organizations. However, they can operate through the merchant company itself.
Credit card processing through payment gateways occurs through one of two ways. The merchant may manually input the relevant card details via a virtual card terminal. Alternatively, the merchant will process details in real time using interactive features on the merchant’s website (such as an interactive shopping cart).
Read more: Online processing