Credit card processing can be a complex, costly, and sometimes bewildering aspect of running a modern business. Yet, in today’s economy, particularly in the U.S., accepting non-cash payments such as debit, credit, and digital payments is virtually indispensable. These methods have increasingly become the preferred way to transact.

The key to a smoother payment processing experience is to first understand the fees you’re being charged and the various options available to you.

This guide to the best credit card processing companies will equip you with a deeper understanding of the mechanisms of credit card processing. It includes detailed explanations on what constitutes a payment solutions provider, how the processing actually works, the associated fees, the potential risks, and more. This information aims to demystify the complexities and help you navigate the intricacies of credit card processing more effectively.

Understanding Credit Card Payment Processing

Credit card payment processing refers to the sequence of actions needed to transfer funds from a completed sale into your business’s bank account efficiently, affordably, and smoothly. While many businesses still accept cash, integrating credit card payments is crucial for growth.

In digital transactions, payment processing happens within seconds. It involves the authorization and authentication of credit card details, facilitated by rapid information exchanges between the merchant’s terminal or payment gateway, the payment processor, credit card networks like Mastercard, Visa, American Express, and Discover, and the card issuer (e.g., Chase, Wells Fargo, Bank of America, American Express).

After the card is authorized, the funds move through these financial entities and ultimately deposit into the merchant’s account, making them available for business use.

Role of a Credit Card Processing Company

A credit card processing company acts as an intermediary that facilitates the transfer of funds between a merchant and a customer’s credit card issuer. When a customer makes a purchase, either online or offline, their credit card details are sent to the processing company. This company then forwards the information to the credit card issuer, who checks the cardholder’s identity and determines whether to approve or decline the transaction. If approved, the processing company ensures the merchant receives the payment.

Credit card processing companies are essential for any business. They not only enable payment acceptance but also play a crucial role in securing customer data and preventing fraud.

Key Players in Credit Card Processing

Credit card processing involves several essential entities that work together to securely manage payments at the point of sale (POS). Here’s an overview of each participant’s role in the process:

• The Merchant: Merchants offer goods and services to customers and must adhere to credit card regulations. They require a system to accept payments, typically provided by a payment service provider.
• The Cardholder: Also known as the customer, a cardholder is an individual issued a credit card by their bank to purchase goods or services from merchants.
• Payment Gateway: This technology links the merchant to a payment processor. It integrates with both card-present (e.g., in-store purchases) and card-not-present environments (e.g., online transactions), captures payment details and routes them to the payment processor or merchant bank. It also delivers the merchant an “approved” or “declined” message.
• Credit Card Processor: Sometimes called a “payment processor,” this entity facilitates communication among the merchant, the credit card network, and the cardholder’s bank. It ensures compliance with Payment Card Industry Data Security Standards (PCI DSS). Some processors offer integrated payment gateways, while others partner with gateway providers.
• Card Network: Known also as the “credit card network” or “brand,” such as American Express, Visa, Mastercard, or Discover. The network sets fees like interchange and assessment fees and defines the standards for PCI DSS compliance.
• Issuing Bank: Also called the “cardholder’s bank” or “consumer bank,” this bank issues credit cards to consumers. It verifies whether the cardholder has sufficient funds for a transaction and authorizes the release of funds for settlement.
• Acquiring Bank: Often referred to as the “merchant bank,” this is the bank where the merchant holds their business funds and receives money from transactions. It can also provide card-reading equipment and sometimes acts as a credit card processor.

What Is the Credit Card Payment Process?

Credit card transactions encompass multiple parties and unfold over three primary phases:

• Credit Card Authorization: This step involves verifying with the issuing bank that the credit card has adequate funds, is active, and the transaction data is correct. If these conditions are met, the transaction is approved.
• Clearing: Once the transaction is approved, it moves to the clearing stage. Here, the processor forwards the transaction data to the card brands and issuing banks. This action results in the transaction appearing on the cardholder’s account statement.
• Settlement: In the final stage, after the transaction details are reflected on the cardholder’s account, the funds are transferred from the issuing bank and the cardholder’s account to the acquiring bank. The acquiring bank then deposits these funds into the merchant’s account.

The authorization stage initiates when a customer hits the pay button at an online checkout or makes a PIN or contactless payment in-store. This action triggers a request to the acquiring bank via the payment provider’s gateway to start processing the payment.

The transaction is forwarded to the card association during authorization and eventually reaches the customer’s issuing bank. If the transaction is valid and there are no issues with the customer’s card, the bank approves the transaction, allowing the merchant to proceed with the sale. Following approval, clearing and settlement take place. The payment service provider sends the transaction details to the payment card network, which then liaises with the issuing bank to levy a charge on the customer’s account.

The payment card network then collects the funds from the issuer and transfers them to the merchant’s acquiring bank, deducting interchange fees that facilitate the transaction. Finally, during the funding stage, funds are moved from the acquiring bank into the merchant’s account. Credit card processing is typically fast, enabling merchants to receive funds overnight or within one business day.

Credit Card Processing Service Fees

With a clear understanding of the roles each party plays in credit card processing, we can now delve into the various fees associated with transactions. These fees can vary depending on your merchant services provider, so it’s important to regularly review your monthly statement to ensure you’re not overpaying for credit card processing services.

• Assessment or Service Fee: Charged by the card network, this fee is typically a small percentage of the transaction and can vary based on your transaction volume and the risk level assessed by the card networks.
• Processing Fee: Each payment processor sets their own fees, known as the payment processor markup. This fee varies depending on the processor’s pricing plan.
• Recurring Fees: In addition to the interchange fees, many providers charge additional merchant fees for profit. These fees can frequently appear on your monthly statement, although they are not mandatory for accepting credit card payments. Common recurring fees include monthly minimums, statement fees, batch fees, next-day funding fees, annual fees, and IRS report fees.
• One-Off Fees: These fees occur just once and can include costs for terminal setup, early termination, reprogramming, PCI compliance, address verification, chargeback and retrieval, and payment gateway usage.

Staying vigilant about the fees listed on your credit card processing statement each month is crucial. Many businesses aren’t fully aware of the fees they’re being charged or the reasons behind them, allowing merchant service providers to profit significantly.

Credit Card Processing: Overview of Pricing Models

Credit card processing pricing models vary significantly, and small business owners must grasp the different plans available from various credit card processors (or merchant service providers). Understanding these models allows you to effectively compare processing costs and choose the best option for your business needs. Here, we’ll explore the range of pricing models most merchant account providers typically offer.

Interchange Plus Pricing

Many merchants favor this pricing model for its transparency and consistency. It remains unaffected by transaction volume or average ticket size. In this model, the processor directly charges the merchant the interchange fees and card association fees, adding a predetermined markup fee to cover their own costs. Each transaction includes the standard interchange fee specific to the card used and the provider’s fee.

The advantage of Interchange Plus Pricing is its cost-effectiveness compared to other models. It eliminates concerns about categorizing transactions and avoids the risk of overcharging small transactions, a common issue with flat fee processing. The primary challenge with this model is the variability of interchange fees, which can differ significantly between card-issuing banks and may be difficult to predict.

Tiered Pricing

Tiered pricing models categorize transactions by type, applying varying rates to each category. Generally, there are three tiers: qualified, mid-qualified, and non-qualified, with rates increasing at each level.

Details vary among processors, but typically, transactions with non-rewards cards that are physically processed (dipped or swiped) qualify for the lowest rate in the “qualified” tier. On the other hand, transactions that are not physically present (like online purchases or manual entries), or those involving rewards or corporate cards tend to fall into the higher-priced tiers, reflecting their greater risk and cost.

Flat Rate Pricing

Flat-rate credit card processing is a prevalent model used by traditional payment processors and major payment service providers (PSPs) like Stripe.

This model simplifies pricing compared to tiered systems by bundling costs into one or two fixed rates, depending on the transaction type. Typically, a lower rate is applied to card-present transactions, while a higher rate is charged for card-not-present transactions, encompassing manually keyed-in transactions and online payments.

Flat Rate Subscription

Unlike other models, flat-rate subscription pricing does not calculate fees based on a percentage of sales. Instead, merchants pay the card issuers’ interchange and network fees plus a flat monthly or annual service fee to the processor.

This model can be particularly advantageous for new or growing businesses with moderate sales volumes. However, the provider may require a more costly monthly subscription as sales volume increases. This is usually managed through a cap on the number of transactions processed, with different membership levels that include varying numbers of transactions. Once a business reaches the maximum allowed transactions, the provider will typically require an upgrade to a higher-cost plan.

For business owners, it’s wise to compare these costs against other pricing models. While sometimes a cost-effective choice, flat-rate subscriptions can also become quite expensive as transaction volumes grow.

Back Bill Pricing

This pricing model, called the Back Bill model, is different from the others we’ve discussed. Here the provider charges the merchant a fixed rate for all monthly card transactions. At the end of the month, the provider checks all transactions to see if the fees paid to the card networks were higher or lower than what was charged to the merchant initially. If the fees exceed the fixed rate, the extra amount is added to the next month’s bill.

For instance, let’s say the provider charges a flat rate of 2.5% per transaction. If the actual interchange fee for a transaction is higher, let’s say 2.8%, the merchant will be billed the difference on the next bill, in this case, 0.3%. However, if the actual fees are less than the 2.5% charged, the provider keeps the difference as profit and doesn’t give a refund.

Though this model appears straightforward, managing it can be challenging. Merchants may struggle to verify the accuracy of adjustments without resources to meticulously review the previous month’s transactions, making it confusing and hard to track.

Payment Processing Technology

Every business has unique needs, particularly in how it processes payments. Selecting the right technology is crucial for your success, so it’s important to understand your specific requirements and secure the best payment technology solutions available.

• EMV Smart Terminals: Essential for security, EMV (Europay, MasterCard, and Visa) terminals utilize chip technology to safeguard card transactions, significantly reducing fraud risk.
• Online Invoicing: This technology enables businesses to send electronic invoices directly to clients, enhancing both efficiency and tracking capabilities. It seamlessly integrates with various digital payment methods.
• Mobile Payment Solutions: With the rise of mobile transactions, platforms like Apple Pay and Google Pay are becoming increasingly popular. These solutions provide convenience and speed, appealing to users who prefer mobile transactions.
• Credit Card Processing: Credit card processors are fundamental for retail businesses. They need to be secure, robust, and flexible, supporting a variety of payment methods and currencies.
• Virtual Terminals: These online systems allow for manual transaction entries, commonly used for telephone or mail orders. They operate without the need for physical card swiping.
• Online Shopping Cart: Essential for e-commerce, a shopping cart integrates into a website to manage sales transactions, inventory, and customer data, facilitating a streamlined shopping experience.
• APIs (Application Programming Interfaces): APIs are crucial for integrating various payment services and platforms, enabling businesses to customize payment processing systems according to their operational needs.
• Point-of-sale (POS) Systems: Today’s POS systems do more than process payments; they also manage inventory, sales reports, and customer relationships and can integrate with mobile payment options and loyalty programs.

Conclusion

Understanding credit card processing is crucial for any modern business. It involves knowing who handles what, the fees charged, and how you can be charged. With this knowledge, you can make informed decisions and ensure your customers have seamless transactions while avoiding unnecessary expenses.

Whether operating a physical store or an online business, selecting the right payment technology is significant in today’s market. With this information, you can navigate credit card processing like a pro and manage your finances effectively.