The ABCs of Credit Card Processing: The Mechanisms at Play
Published: November 21, 2023
Credit and debit cards have become a ubiquitous part of modern-day transactions. You swipe them at the grocery store, use them to book travel, and even use them to pay your utility bills online. But have you ever stopped to think about how they actually work?
In this blog post, we'll take a closer look at the journey of a credit card transaction and unpack the fees associated with processing credit cards. Lastly, we'll touch upon security measures in place to ensure safe transactions and answer an important question: how do you choose the right one?
The Basics of Credit Card Processing
Credit card or payment processing refers to the handling of electronic payment transactions for goods and services. It's the backbone of countless daily transactions, seamlessly linking consumers, businesses, and financial institutions. It involves a series of steps and parties working together to facilitate secure electronic payments.
Features & Services Offered
These services and features collectively contribute to the efficiency, security, and flexibility of credit card processing for businesses. Different credit card processing companies may emphasize different aspects based on the needs of their target customers.
- Integration: They provide application programming interfaces (APIs) that allow businesses to integrate their payment processing systems seamlessly. This integration can occur on various platforms, including websites, mobile applications, and point-of-sale (POS) systems
- Security protocols: They use encryption techniques, such as tokenization and end-to-end encryption, to secure sensitive data, such as credit card numbers, during transmission. This helps prevent unauthorized access and protects customer information
- User-friendly interface: They provide merchants with user-friendly dashboards that clearly overview transactions, sales, and other relevant data. Many providers offer mobile apps or responsive web interfaces, allowing merchants to manage transactions on the go
- Multi-currency support: Businesses operating internationally benefit from credit card processors that support multi-currency transactions. This enables customers to pay in their local currency, providing a smoother experience
- Chargeback management: These providers typically notify merchants of potential chargebacks and provide tools for managing and resolving these disputes. Some processors offer analytics tools to help merchants identify patterns and reduce the likelihood of chargebacks by addressing underlying issues
CCP: Parties Involved
Understanding all of the parties involved is critical to comprehend the complexities and interconnectedness of credit card processing. Each entity contributes to developing a dependable and secure system for electronic payments in several contexts, ranging from typical retail settings to the broad landscape of e-commerce. The parties involved include the following:
- Merchant: The merchant provides goods or services in exchange for payment and initiates the transaction process. They request payment authorization from the payment processor, typically through a point of sale (POS) system or online gateway
- Cardholder: The cardholder initiates the transaction by presenting the credit card to purchase goods or services. They engage directly with the POS system, either physically at a brick-and-mortar store or virtually through online, mobile, or in-app payment methods
- Payment processor: They facilitate communication between the merchant, cardholder, card association, and issuing bank; they receive the payment authorization request from the merchant and forward transaction details to the appropriate card association
- Credit card network: Companies like Visa, American Express, and Mastercard provide the infrastructure enabling transactions between various parties in the system. They also oversee the flow of information between the merchant, card association, and issuing bank, ensuring the security and efficiency of transactions
- Issuing bank: They hold the cardholder's bank account and decide whether to approve or decline the transaction. They receive the authorization request from the card association, evaluate the transaction based on factors like available funds and account status, and communicate the decision back to the merchant through the chain
- Acquiring bank (merchant bank): They work with the merchant to handle the financial aspects of the transaction. They receive the approval or denial status from the card association and ensure the funds are transferred from the issuing bank to the merchant's account
Breaking Down the Steps of CCP
The way credit card processing works might seem complicated, but here is a breakdown of the steps taken for a seamless experience:
Step 1: Authorization
When customers pay using their card, they provide the card information to the store. This can be done by either swiping the card or sharing the card details in an online shop. The store then sends this information to the card processor, which in turn sends it to the card network and the customer's bank to verify the transaction. The purpose of this verification is to ensure that everything is in order and there are no issues with the payment.
Step 2: Authentication
The bank reviews the transaction and approves it if acceptable. The store then receives permission to give the customer their purchase.
Step 3: Clearing
The store sends approved payments to the processor, who forwards them to the card network. The card network then informs the customer's bank about the transactions.
Step 4: Settlement
The bank charges the customer's card, deducting fees and transferring the rest to the processor. The processor then sends the funds to the store's bank, completing the transaction.
Types of Payment Processing
In today's diverse market, you can choose from various payment methods. These alternatives offer flexibility and cater to evolving consumer preferences. Beyond traditional payment processing, options include the following:
- In-person processing:
- Utilized through a credit card reader or terminal
- Commonly employed in physical retail stores with a brick-and-mortar presence
- Applied in e-commerce settings
- Directs the cardholder to a payment gateway on a website, where personal information is entered for transactions
3. Mobile processing:
- Transaction processing is carried out using a mobile device
- Offers flexibility for on-the-go payments and transactions
4. Virtual terminal processing:
- Web-based application facilitating transaction processing
- Frequently employed by businesses accepting payments over the phone
5. POS processing:
- Similar to in-person processing
- Utilizes a point-of-sale (POS) system for efficient payment processing, often found in various retail environments
Their Impact on Your Business
Working with this payment system brings a range of advantages and disadvantages to the financial landscape of both merchants and consumers.
Increased sales and customer convenience
Accepting credit cards expands a business's customer base, as many consumers prefer the convenience of electronic payments. This can lead to increased sales and improved customer satisfaction.
CCP accelerates transactions, reducing wait times for customers. This efficiency is particularly valuable in high-traffic retail environments.
Online business opportunities
For e-commerce businesses, CCP is essential. It opens doors to online sales, allowing merchants to tap into a global customer base.
Fees and costs
One significant drawback is the cost associated with payment processing. Merchants pay fees for each transaction, impacting profit margins. Understanding and managing these costs is crucial for businesses.
As electronic transactions become more prevalent, so do security risks. Merchants must invest in robust cybersecurity measures to protect sensitive customer information and maintain trust.
Chargeback and disputes
If a customer disputes their charges, the business often has to issue a refund and pay a chargeback fee. Additionally, chargebacks and disputes can be time-consuming and costly for companies.
How secure are they?
Security is a paramount concern in payment processing. The industry has implemented multiple layers of protection, including encryption, tokenization, and two-factor authentication. Compliance with the Payment Card Industry Data Security Standard (PCI DSS) is mandatory for businesses to ensure a secure environment for credit card transactions.
The CCP fees vary depending on transaction volume, business type, and the chosen payment processor. Generally, they range between 1.5% and 3.5% of transactions. Common pricing models include subscription-based, interchange-plus, and flat-rate payments. Merchants should carefully review fee structures to choose a plan that aligns with their business model.
Choosing the Right CCP for Your Business
Choosing the right provider is crucial for businesses, as it can impact efficiency, customer satisfaction, and overall financial success. Some tips to help you make an informed decision when it comes to the provider to work with include, but are not limited to, PCI compliance, Mastercard and Visa (EMV) compliance, as well as having a track record of being at the forefront of security, such as through the use of tokenization or end-to-end encryption.
Top 5 Providers
Here are five top credit card processing providers known for their reliability and diverse offerings:
Stax is a firm that sells solutions to both small and medium-sized companies (SMBs) and major corporations. They offer features such as internal IT support, dedicated account management, and a wide range of no-cost integrations.
Square is a significant financial services and digital payments firm owned by Block Inc., a financial services and technology corporation that works with blockchain. Square, launched in 2009 by Jack Dorsey and Jim McKelvey, has become a popular option for companies to take credit card payments and utilize phones or tablets as payment registers for a POS system.
Stripe is a merchant services company that provides payment processing solutions to companies of all kinds. They offer merchant accounts and related services like payment gateways, online transaction processing, POS systems, and credit card readers.
Clover is a firm that provides solutions for SMBs such as restaurants and retail establishments and professional, personal, and home & field services. They were started in 2011 in Sunnyvale, California, and have witnessed fast development since then, servicing over 3 million merchants worldwide.
Helcim is a payment processing and merchant services firm based in Calgary, Alberta, created in 2006. They are a quick, safe, and dependable credit card processor that offers payment solutions to over 20 countries and all companies globally. They provide various services, such as online payments, POS systems, virtual terminals, and mobile payments.
Credit card processing has evolved into a sophisticated technology, allowing smooth transactions across several sectors. Businesses should use this payment option for various reasons, including higher sales and simplified transactions. However, navigating the accompanying hurdles, such as costs and security issues, is critical.
As technology advances, the landscape of this industry will experience significant changes. Staying up-to-date on current trends and selecting the best payment processing system for your company are critical steps in achieving long-term success. For more information on alternative providers, take a look at our review, blog, and comparison pages.