What is Credit Card Processing?
Accepting credit cards in person, over the phone, online, or via mail order requires having a payment provider that can securely process each transaction. Most businesses know this and are content to use any payment processor that does the job.
However, understanding what happens behind the scenes allows you to better navigate the payments landscape so you receive the greatest benefit at the lowest possible cost.
This article explores:
- How credit card processing works
- Who is involved in credit card processing
- Credit card processing fees and costs
- How long it takes to settle credit card sales
- Credit card processing and payment security
- Fixing issues in your payment environment
Let’s take a look.
How Credit Card Processing Works
The process begins when a customer provides his or her payment details, whether it’s:
- In person using a card reader at the point of sale (POS)
- Online using your e-commerce store’s hosted payment form
- Over the phone, via email, or by snail mail
This credit card information is securely captured by your payment processor before being encrypted and routed to the front-end authorization network. The authorization network requests approval from the card-issuing bank.
- If the customer’s account has the necessary funds and the sale looks legitimate, the card-issuing bank approves the transaction. Confirmation is sent to the payment processor, which then returns an approval to the device used to initiate the transaction.
- If the customer’s account lacks the requisite funds or if the transaction looks suspicious for any reason, the card-issuing bank rejects the sale and returns a decline to the device used to initiate the transaction.
Who Is Involved in Credit Card Processing?
All of the above happens in mere seconds, thanks to the seamless cooperation of the various parties involved:
- Card-issuing banks are responsible for supplying customers with secure forms of plastic that adhere to the latest PCI-compliant data security guidelines. At present, this means providing chip-enabled EMV credit cards instead of traditional magstripe plastic.
- Customers are responsible for providing their payment details at the time of sale. If shopping online, they enter this information into the checkout form. When shopping at a store, customers can use a stationary or mobile credit card reader in which to swipe, tap or dip their plastic at the checkout counter. They also can store these details in smartphones or wearable devices that leverage near field communication (NFC ) technology. Apple Pay™ is a prime example of how a virtual wallet works.
- Your business is the primary touchpoint for all transactions. As a brick-and-mortar retailer, most sales will go through your POS terminal. As an e-commerce merchant, your online payment gateway is what captures these credit card details. If you sell over the phone or by email, you can use a virtual terminal to capture payment information. No matter how you interface with customers, you’ll need a merchant account to securely process credit card payments.
- Once the customer’s credit card details have been captured by your point-of-sale device, your payment processor is responsible for securely encrypting information before routing it across the card network to the customer’s bank.
- The customer’s card-issuing bank either approves or rejects the transaction based on a range of criteria, including the time, location, and size of the transaction. The bank might also check the user’s purchase history or your business’s fraud history to determine if anything is out of the ordinary.
- If the sale is approved, the acquiring bank collects the funds from the issuing bank and deposits them into your merchant account.
Congratulations … you’ve just made a sale!
Credit Card Processing Fees and Costs
However, it’s not free. Below are some fees you can expect to pay for the privilege of displaying Visa, Mastercard, and American Express logos on your storefront or e-commerce site:
- Interchange fee: Also known as a wholesale or merchant discount rate, this non-negotiable fee includes both a flat charge (e.g., $0.10) plus a percentage of the transaction amount (e.g., 2% to 3%). Interchange fees represent the largest portion of all credit card processing expenses.
- Markup fee: This is the “retail” rate your payment provider charges to cover the cost of credit card processing, which include the wholesale interchange costs from the card brands in addition to fees for front-end authorization, back-end settlement, reporting, PCI, and the acquiring bank. Essentially, the processor’s profit margin is added to the wholesale rate.
- Assessment fee: These are what credit card associations charge for using their networks. Assessment fees typically range between 0.13% and 0.15% depending on the card brand — i.e., Visa, Mastercard, or American Express.
There also are incidental fees you may be expected to pay, depending on your risk level as a merchant. For example, some businesses are required to pay chargeback fees if a cardholder initiates a disputed charge with the card issuer on a transaction. There are higher chargeback fees for merchants with a larger percentage of disputed charges. Most processing companies won’t allow merchants to have a 1% or higher chargeback ratio to sales. This is an issue merchants who are frequently victims of friendly fraud need to be aware of.
To see a more comprehensive list of potential credit card processing fees, click here .
How Long It Takes to Settle Credit Card Sales
Credit card approvals take only a few seconds, with the sale being credited to your account almost instantly. However, it can be several days before that money actually arrives in your bank account, as the acquiring bank needs time to fully reconcile the payment before releasing funds.
Some payment providers and acquiring banks are able to expedite this process, but average settlement time takes between one and three business days. Some factors that affect this process are:
- The time of day the transaction was processed (i.e. evening or weekend)
- The timeframe needed to review the transaction to ensure there is no fraud and it meets the thresholds the merchant was approved for with its merchant account
Settlement can occur instantly if customers use debit cards tied directly to their bank accounts.
Credit Card Processing and Payment Security
Credit card processing works only if all parties have faith and confidence in the system. This is especially true for consumers who must willingly hand over payment details to businesses.
To help minimize breaches, the Payment Card Industry (PCI) introduced a set of mandatory data security guidelines. Known as PCI compliance, these rules apply to any organization that captures, accepts, sends, or stores payment card data of any kind.
To remain in good standing with the Payment Card Industry and reduce the risk of fraud in your business, you are expected to:
- Use a PCI-compliant payment processor for all card-based sales. Your processor should be able to demonstrate a consistent track record of data security, complete with verifiable uptime for its payment network.
- Require that online customers verify their identities by providing card numbers, expiration dates, CVV codes, billing addresses, and even multi-factor credit card authentication.
- Take proactive steps to reduce vulnerabilities in your payment environment, including installing security patches and updates for any IT infrastructure that comes into direct contact with stored credit card data. An annual PCI self assessment can help you identify these potential vulnerabilities.
- Leverage advanced security tools to further reduce the risk of data breaches. Tokenization , point-to-point encryption, fraud management filters and hosted payment pages are just some of the more popular tools we use at BluePay.
Depending on your business, you may need to implement additional security measures to keep your customers’ payment data safe.
Troubleshooting Problems in Your Payment Environment
Even after finding the perfect payment processing solution for your needs, problems may arise occasionally:
- Your POS credit card reader could malfunction.
- Your payment gateway might need an update.
- A customer could dispute a legitimate charge.
Issues such as these are inevitable, especially as your sales volume continues to grow over time. Therefore, it’s imperative that your payment processor be easily accessible to help troubleshoot whatever challenges crop up — every second of downtime represents potential lost revenue.
Nearly all payment processors offer email support, at the least. But to get your business up and running as quickly as possible, it’s best to choose a provider that also offers 24/7 customer support by phone. There is peace of mind in knowing that you can reach a customer representative whenever your payment environment needs troubleshooting.
BluePay Has You Covered
By now, you understand the basic anatomy of a successful credit card transaction — including how it works, who is involved, what it costs, and how best to keep your customers’ financial data safe from theft and abuse.
Use this information to shop for the best payment processing solution for your needs.
To learn why businesses choose BluePay’s PCI-compliant credit card processing, schedule a free consultation with our merchant services team today.