When you swipe your credit or debit card at the grocery store, or type in your credit card number to purchase something online, you're participating in a payment processing system that is used by millions of businesses all over the world. But how does it actually work? In this article, we'll take a look at the steps involved in credit and debit card payments processing, and explore what factors influence each stage of the process.

What Is Credit Card Processing?

Credit card processing is the act of accepting credit cards as a form of payment for goods or services. This can be done in person, online, or over the phone. Credit card processing typically involves four steps: authorization, capture, settlement, and funding.

Authorization is the first step in credit card processing. This is when the credit cardholder's bank approves the purchase. Capture is when the credit card information is sent from the merchant to the credit card processor. Settlement is when the funds from the sale are transferred from the credit card processor to the merchant's bank account. Funding is when the merchant finally receives the funds from the sale.

Credit card processing can be a complex process, but it is essential for businesses that want to accept credit cards as a form of payment. By understanding how credit card processing works, businesses can be better prepared to accept credit cards and avoid potential problems.

Breaking Down the Authorization Process

credit card authorization is the process of verifying that a credit card is valid and that the cardholder has the available credit to complete a transaction. This process often happens in just a few seconds, and usually results in either an approval or denial message appearing on the card reader or point-of-sale system. Credit card authorization usually requires that the credit card number, expiration date, and security code be entered into the system.

For in-store transactions, this information is typically read from the credit card using a card reader. For online transactions, the credit cardholder typically types this information into an online form. After the credit card information is entered, the credit card issuer is contacted to verify that the account is active and that there are sufficient funds available to cover the purchase amount. If everything checks out, the issuer approves the transaction and sends a confirmation message back to the merchant. The whole process usually takes just a few seconds, but can occasionally take longer if there is an issue with either the credit card or the account. In such cases, the issuer may require that the transaction be completed using another payment method.

Settlement is the Second Stage of Credit Card Processing

Credit card processing involves several different steps, and settlement is the second stage. This process happens among the merchant, acquiring bank, card network and issuing bank. Each credit card authorization is stored in a merchant’s point-of-sale system. Typically at the end of the business day, a merchant sends a batch of authorizations to the acquiring bank. The acquiring bank will then confirm each authorization and send the batch via the card network to the issuing bank. The issuing bank will then post the charges to the cardholder’s account and send a confirmation back to the acquiring bank. Finally, the acquiring bank will settle with the merchant, deducting any processing fees along the way. This process may seem complex, but it helps to ensure that both merchants and cardholders are protected from fraud.

How Long Does Funding Take?

In most cases, you will receive your funds within two to three business days. However, it can sometimes take up to a week for the funds to be deposited into your account. The timing depends on a number of factors, including how quickly the credit card issuer processes the transaction and how your bank handles incoming deposits.

Overall, funding from credit card processing is relatively quick and easy. However, there are a few things to keep in mind in order to ensure that the process goes smoothly. First, be sure to provide accurate and up-to-date information to your processor. Second, make sure that you have enough money in your account to cover any fees associated with processing credit card transactions. Finally, be patient - it can sometimes take a few days for the funds to be deposited into your account. But once they are, you'll be able to use them to grow your business.

Why Do Businesses Need To Know About Credit Card Processing?

Credit card processing has become an essential part of doing business in the modern world. More and more customers are using credit and debit cards for their purchases, and businesses that don't accept these forms of payment can miss out on a lot of potential sales. However, credit card processing can be complicated and expensive, so it's important for businesses to do their research before signing up for a service. There are a few key things that businesses need to keep in mind when considering credit card processing. First, they need to make sure that they understand all of the fees associated with the service. Second, they need to find a processor that offers competitive rates. And finally, they need to find a processor that offers excellent customer service. By taking the time to find a good credit card processor, businesses can ensure that they're able to accept payments from their customers without incurring any unnecessary costs.

What are the Costs and Fees Associated with Credit Card Processing?

When you own a business, there are a lot of things you need to think about in order to keep it running smoothly. One of the most important things is how you're going to process payments. Credit card processing can be a great option, but it's important to understand the costs and fees associated with it before you make a decision.

First, you'll need to obtain a merchant account. This is an account with a bank or other financial institution that allows you to accept credit and debit card payments. There are usually some setup costs involved in getting a merchant account, as well as ongoing monthly fees. You'll also need to pay transaction fees each time a customer uses their card to make a purchase from your business. These fees can vary depending on the type of card used and the amount of the purchase.

If you're thinking about using credit card processing for your business, it's important to do your research and compare different options to find the best fit for your needs. By understanding all of the costs and fees involved, you can make sure you're making the best decision for your business.

Processing Fees Explained

Interchange Fee. The interchange fee is the wholesale fee mentioned above. This is a standard, non-negotiable fee that covers the costs of processing the transaction, the risk of payment approval, and the risks of fraud and bad debt. Collected by the consumer (issuing) bank, the interchange fee is a percentage of the purchase total plus a set transaction fee that’s determined by each card network. This fee represents the largest cost of credit card payment processing, and is typically impacted by the type of credit card involved in the transaction. The average interchange rate in the U.S. is around 2%, but can be as high as 3% for premium cards like rewards cards. For merchants, these fees are typically passed on to customers through higher prices. However, some businesses choose to absorb these costs instead. Either way, understanding how interchange fees work is important for both consumers and businesses alike.

Assessment or Service Fee. An assessment or service fee is a non-negotiable fee charged by the card network. This fee is typically a small percentage and can be affected by your transaction volume and your risk level as assessed or calculated by the card networks. The purpose of this fee is to cover the costs associated with processing card payments, such as maintaining and upgrading the card network infrastructure, investigating fraud, and providing customer service. This fee is separate from the interchange fees charged by banks, which are also passed on to merchants. While assessment fees are generally lower than interchange fees, they can still add up, especially for high-volume businesses. Fortunately, there are ways to reduce your assessment fees, such as negotiating with your acquirer or using a pricing model that passes on these charges to your customers.

Processing Fee. When you accept payments online, you'll likely be charged a processing fee by your payment processor. This fee is known as the payment processor markup, and it can vary depending on the processor's pricing plan. typically, payment processors charge a percentage of the total transaction amount, plus a fixed per-transaction fee. For example, a processor may charge 2.9% + $0.30 per transaction. This means that if you accept a payment of $100, you'll be charged $2.90 in processing fees ($100 x 2.9% + $0.30). While these fees can add up, they're generally much lower than the fees charged by traditional brick-and-mortar businesses. As such, accepting payments online is often an affordable way to do business.

Types of payment processor pricing models

Flat Rate. A flat rate is a simple fixed fee that a processor charges for all credit and debit card transactions, regardless of the card used for payment. Card-present transactions often have a lower flat rate than card-not-present transactions, as they carry less risk. This can be structured as a base rate (for example, 2.9%), or a base rate plus a small per-transaction amount (for example, 2.9% + $0.30 per transaction). This model merges the wholesale and the markup fees instead of splitting them out. Flat rates are typically used by processors who want to simplify their pricing structure, or by businesses with low transaction volume who don't qualify for discounts on interchange fees. While flat-rate pricing can be easy to understand and predict, it's important to compare your total costs before choosing a processor. In some cases, tiered pricing or other pricing models may be a better fit for your business.

Tiered. A tiered pricing model is a fee structure that credit card processors use to charge merchants for each transaction. The processor charges a fee based on the card type used in the transaction, how much risk is associated with the transaction, and the overall transaction volume of the business. This model is considered to be the most complex and potentially most confusing to merchants. In general, there are three tiers: qualified, mid-qualified, and non-qualified. The qualified rate is the lowest rate and is typically only charged on transactions made with cards that offer rewards, such as cash back or points. The mid-qualified rate is charged on transactions made with cards that do not offer rewards, such as business cards or debit cards. The non-qualified rate is the highest rate and is typically charged on transactions that are considered to be high risk, such as international transactions or transactions made with new or unproven businesses. By understanding how this pricing model works, merchants can be better prepared to negotiate fees with their processor and avoid paying more than they need to.

Interchange Plus. The Interchange Plus is the most common pricing model, and often considered the most transparent and cost-effective. Here, the merchant is charged a percentage of the transaction plus a fixed per-transaction fee. In this way, the wholesale fee (the “interchange” part) and the markup fee (the “per transaction” part) are distinctly and clearly separated. For example, a $100 payment made with a Visa Rewards credit card might carry a total (effective) rate of 2.13%, which includes the interchange fee, the card network fee, and any other assessments that might apply. The processor's markup might be 10 basis points (0.10%), so the merchant would pay an additional 10 cents on that particular transaction. In this pricing model, it's easy to see how much of the fee goes to cover actual costs (the interchange), and how much is profit for the processor (the 10 basis points). From a cost perspective, then, Interchange Plus pricing can be quite favorable for merchants – especially those with higher average ticket sizes. When comparing rates between processors, it's important to make sure you're looking at apples-to-apples quotes, with all fees included. Otherwise, you might  not be getting the whole story.

Subscription. A subscription payment processor is a type of service that helps businesses to process their payments on a recurring basis. The processor charges a flat monthly service fee, along with a small per-transaction fee. The wholesale fee is charged separately from the markup fee. In most cases, the subscription payment processor will also offer other services, such as fraud protection and chargeback management. While the pricing model may vary depending on the processor, the subscription payment processor typically offers a more affordable option for businesses that need to process payments on a regular basis.

Now that you understand how credit and debit card processing works, as well as the different pricing models processors use, you can make an informed decision about which processor is right for your business. By understanding the fees you're being charged, and what those fees are actually for, you can be sure you're getting the best possible value for your credit card processing needs.

Do you have questions about credit card processing? Leave a comment below and we'll do our best to answer them!

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