credit card processing

Credit Card Processing – How it works for your Business

Credit Card Processing – How it works for your Business

The steps of the credit card processing explained

Credit Card Processing – How it works for your Business

Business owners and managers tend to also be savvy consumers. That’s understandable since you routinely evaluate the many products and services needed to keep your business running smoothly.

Accepting credit and debit cards enables you to get paid. That means you’ll need to select a credit card processing company. Credit card processors are important partners beyond the core service of processing payments, making it a critical business decision. You don’t need to become an expert, but you’ll be a better consumer if you know how credit card processing actually works.

To understand how the payment process works, we’ll look at the actors and their roles.

Who are the actors in a credit card processing transactions?

• A cardholder obtains a credit or debit card from an issuing bank, and uses the account to pay for goods or services instore or online

• A merchant is any type of business that accepts card payments in exchange for goods or services sold instore, online or via a virtual terminal

• The Acquiring bank establishes and maintains merchant services accounts. Acquirers allow merchants to accept deposits from credit and debit card payments and will determine the fees the merchant is charged based on the type of goods or services they are selling, which will be categorised into low, medium and high-risk sectors.

• Payment Gateways are companies that process credit and debit card transactions. Payment gateway connect merchants, Acquiring banks, card networks and others to make card payments possible either instore, online or through a virtual terminal

• Issuing banks are the banks, credit unions and other financial institutions that issue debit and credit cards to cardholders through the card associations.

• Card associations include Visa, Mastercard, Discover and American Express. The card associations set interchange rates and qualification guidelines, and act as the arbiter between issuing banks and acquiring banks among other vital functions.

What does credit card processing look like in motion?

Credit card processing works in three distinct processes:

1. Authorisation

2. Settlement

3. Funding

First, let’s look at the vredit card authorisation process.

1. The cardholder presents their card (or other secure method) to a merchant in exchange for goods or services. The request might originate from an in-store card terminal, Virtual Terminal for Mail Order Telephone Order (MOTO), Pay by Link, or eCommerce website gateway, through mobile or online payment acceptance.

2. The merchant sends a request for payment authorisation to their payment gateway.

3. The payment gateway submits transactions to the appropriate Acquirer who issues the merchant account and then using the card associations rails, the transaction eventually reaches the issuing bank.

4. Authorization requests are made to the issuing bank for the credit cards, including parameters like CVV, AVS validation and expiration date.

5. The issuing bank approves or declines the transaction. Transactions for credit cards can be declined for insufficient funds or available credit, if the cardholder’s account has been closed or expired.

6. The issuing bank then sends the approval (or denial) status back along the line to the card association, acquirer, payment processing gateway and finally to the merchant.

That’s the credit card authorization process in a nutshell.

Now let’s look at settlement and funding.

1. Merchant(s) authorised transactions are stored by payment processing gateway as part of the payment flow.

2. Each day, the payment gateway sends a settlement file of all authorised transactions details to the acquiring bank that communicate the appropriate debits with the issuing banks through the card association rails

3. The issuing bank charges the cardholder’s account for the amount of the transactions.

4. The issuing bank then transfers appropriate funds for the transactions to the acquiring bank.

5. The acquiring bank deposits funds into the merchant account minus the associated fees charged for the transactions.

That’s the simplified credit card payment process.

Authorisation takes a matter of seconds. Settlement and funding used to take days, but now is almost always handled overnight, helping you get your money quickly.

Opening or switching a card payment merchant account

If you currently have a business or are considering starting one, chances are you’ll want to be able to accept credit and cards, since they are a preferred payment type for many consumers. In order to do so, you’ll need to establish a merchant account.

No doubt you’ve heard about this, and quite possibly you’re not entirely sure what it means and how it fits in the much larger world of payments. That’s understandable. We’re here to help you sort through the complex and often contradictory information of your credit card processor.

What exactly is a merchant account?

A merchant account is a type of bank account for credit card processing that allows a business to accept credit card and debit card payments, along with other types of electronic payments.

This type of account is set up with a payment processing that manages the processing of payment when customers pay for goods and services with their credit card. A credit card processor usually requires an agreement between the merchant and the acquiring bank (the financial institution that processes the credit card processing for the merchant) and any other parties involved in processing credit card payments such as a credit card payment processing, an independent sales organization (ISO), and/or a member service provider (MSP).

Whether the agreement is between the credit card processors and the acquiring bank, or through a payment aggregator, like an ISO (which allows a merchant to accept credit and cards without having to setup a merchant account themselves), it acts as a contractual agreement that also requires the merchant to adhere to operating regulations established by the card associations, including payment security mandates.

Not every merchant services account is designed the same way.

The terms depend on the credit card payment needs of your business, the type of business you run, and the size of your business, among other considerations. Small Business card processing merchant account have different needs than enterprise business solutions.

Before you get merchant services for card payments, also consider fees and costs.

Fees are an important consideration of course but should not be the deciding factor when selecting a credit card processors. Like with most things, you get what you pay for. Most commonly, merchants will pay a fee per transaction and/or a percentage of each transaction for credit card processing.

The fees for a credit card processing merchant account mostly depend on the number of transactions you’ll be putting through the system. However, the fees could also depend on how risky your business is (i.e., businesses operating in a low, medium or high-risk industry) as well as the amount of risk you’ll extend to your customers.

These considerations play into what is called low, medium or high-risk merchant accounts. Fees may be higher, for example, for high-risk merchants that accept credit card payments through a virtual terminal than a low-risk merchant accepting online credit card payments using 3D secure or in store through a payment terminal.

Try to get a combination of payment services from one provider.

To keep it simple, look for a provider that can offer as many services as possible, so you don’t have to use multiple providers. In the end, if you can get other services bundled into your merchant account, it will simplify your payment operations and let you focus on the fun parts of your business.

Opening a merchant account will require underwriting and approvals.

Many merchant accounts have to undergo an underwriting process for approval. How complex this process is depends on the terms. For example, if your account requires a high-risk merchant account, the underwriting process will be more in depth and take into account a number of things, such as your business history, your credit score, the type of account and the risks inherent in your business.

Also, as part of the application process, you will also be asked to provide your Certificate of Incorporation, business banking account information, Directors details, proof of address and other business operational information.

To learn even more about how credit card processing or merchant services work, please get in touch as Payments Connect are happy to answer your questions and walk you through the easy setup process.

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