How Credit Card Processing Works?

Credit card processing is a service that allows online businesses to collect payments via credit or debit cards. These companies act as intermediaries between the customer and the bank, promising to deliver payment for purchases, thus allowing e-commerce stores to avoid collecting sensitive personal information on their websites. This also helps attract international customers who are wary of sharing their data with merchants.

The process of accepting credit card payments is carried out in three steps: acquiring, authorizing, and settling transactions. Each of the major credit card companies works exclusively with one or two of these steps, so not all payment processors offer all three options to their clients. At the same time, almost all providers support online credit card processing as a method of payment.

Acquiring a payment means taking a certain credit card number and passing it to the bank for approval. The actual process takes just a few seconds, but acquiring can also take up to 48 hours, depending on what kind of merchant account the store has signed with its credit card processing company. During this time, the transaction is considered pending, meaning that the payment hasn’t yet been authorized or settled.

Once a transaction has been approved by the credit card company’s issuing bank, it is sent back to the merchant account provider and is then available for settlement. The entire process can take up to five days to be completed, but most merchants choose to settle transactions on a daily basis in order to maximize profit and cash flow.

While acquiring and authorizing transactions are the main focus of credit card processing companies, settlement is used mainly by large retailers that receive many payments every day. For this type of merchant account, the processor transfers only the money for approved transactions into a bank account once per business day (usually in the evening). While slower than authorizing payments, settlement helps maximize available capital and cash flow.

Credit card processing fees are divided into two groups: interchange plus pricing and tiered pricing models. In both cases, credit card companies charge a percentage as a fee for every transaction as well as an additional flat rate. The key difference between them is that the percentage fee with interchange plus is calculated from a merchant’s processing volume, while tiered pricing models charge a fixed rate that doesn’t vary.

The former option makes sense for businesses that have unpredictable sales volumes, as they can end up paying more in fees than necessary if their numbers fall below a certain threshold. On the other hand, the interchange-plus pricing model is better suited for e-commerce stores that know their average monthly revenue and only want to pay the corresponding percentage fee.

Tiered pricing, on the other hand, can be more suitable for established businesses with constant income. While this option doesn’t allow for savings during peaks of activity, it ensures a predictable, flat fee. However, businesses that use this pricing model have to be careful to avoid the most expensive processing categories, because if they go over their limit, they can end up paying more in fees than under other models.

Credit card processing companies usually provide additional services such as fraud protection and chargeback management for an extra fee. While not mandatory, these features can help maximize profits by minimizing losses.

Fraud protection is designed to protect both the store’s customers and its owner from thieves that may attempt to use stolen credit cards. If an illegitimate transaction comes up, the merchant account provider will decline it without charging a fee for this service. This way, both sides are satisfied with the deal.

Chargeback management works similarly to fraud protection, but it’s focused on protecting the store from its customers rather than the other way around. In case a customer disputes a transaction for any reason, credit card processing companies will fight their case and try to win it in order to avoid losing money. Once again, merchants may have to pay a fee for this service, but it can be well worth the cost.

Credit card processing fees are usually divided into three groups: qualified, mid-qualified and non-qualified. In each case, transactions are charged a percentage from 0.20% to 3%, depending on the type of credit card being used to process them. However, the rates can also vary depending on the sales volume of each merchant.

The first type, qualified transactions are subject to a flat fee that doesn’t change no matter how much is being sold. This way, small business owners know exactly what they’ll pay for every transaction made with their customers’ credit cards. Businesses whose average sale is above $15,000 per month may find it more beneficial to switch their credit card processing company to a tiered pricing model.

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Michael Caine

Michael Caine is the Owner of Amir Articles and also the founder of ANO Digital (Most Powerful Online Content Creator Company), from the USA, studied MBA in 2012, love to play games and write content in different categories.