Are you the owner of a small business struggling to understand how credit card processing? Are you losing money every day just because you agreed to accept credit card transactions without understanding the processing costs behind the transactions?
If you are, then this is for you.
Understanding all the processing costs that can potentially be involved a transaction can be nearly impossible to understand due to the sheer number of different fee structures. And you don’t need to understand or remember all these finer details about the fee structures. You just need to make sure you understand the basics enough that you can effectively delegate the task to a provider which can take care of the rest.
Breaking down a standard credit card transaction
Although processing a credit card does not physically take more than a single swipe, the back-end process triggered by the swipe is slightly more complicated. And we need to be able to break down the process and all the parties involved in it to better understand how credit card processing works.
Apart from the customer spending the money and the business conducting the transaction, a standard credit card processing usually involves the following four parties:
- Merchant bank: If you are the owner of the business accepting a credit card transaction, the financial institution providing you banking services to facilitate the transaction is the merchant bank. If you are online business using financial services like PayPal to facilitate credit card transactions, you should note that these services, in and of themselves, do not constitute as banks. These are just the aggregators that can create merchant accounts in banks to process the transaction.
- Card Processors: If you want to understand credit card processing, it is essential to have a basic idea of how processors work. Processors are the third parties involved in the transfer of payment from the customer’s issuing bank to your merchant account. Their primary responsibility is to process the credit card by routing the information to the preferred payment networks.
- Issuing bank: The issuing bank is, usually, the bank in which the customers carry their accounts. These are the financial institutions that offer the credit cards to the customers.
- Credit card brand: There usually are a limited number if credit brands for customers to choose from. The two most popular ones are Visa and Master Card. Apart from these brands, there’s also American Express and Discover.
A usual credit card processing cycle begins when the customers present you their credit card or credit card details. When the card is swiped or the details are entered into the network, a request for authorization is sent, through the card processors, to the customer’s issuing bank which either approves or declines the transaction, based on how much available funds it has.
Once the issuing bank approves the transaction, the details are then sent back, again through the processor, to deliver you the approval code. The bank sends the money to the processors. This money will, at the end of the day, be deposited into your account.