As technology has evolved to be involved in nearly every aspect in life, transactions have not been spared from the trend. Today, payments can be made nearly instantly using a terminal and card, and most businesses must accept this type of payment. Although the deal seems straightforward and instant, payments go through several levels of processing. This is where credit card processing companies are involved.
While understanding every nuance of the industry is not necessary, understanding the payment process will help you be an informed consumer when dealing with credit card processing companies. There are several entities involved with every transaction and different fees incurred at each level of credit card processing. Understanding how these work and what payments are for will make navigating the processing arena achievable.
Who is Involved?
Several financial institutions are required to complete each transaction, all happening in a matter of seconds. From the point of sale, information is passed from the terminal to a processing company to an issuing bank, then, if approved, back to the processing company and the terminal. The titles and roles of each entity are as follows:
Cardholder - A consumer or customer who makes a payment using a card obtained from an issuing bank.
Merchant - A business selling goods or services who accepts payment via bankcard.
Merchant’s Bank (Acquiring Bank/Credit Card Processing Company) - A financial institution that is a registered member of the card associations who provide merchant accounts with the ability to accept credit card payment to merchants.
Issuing Bank - A financial institution that is a registered member of the card associations who issues a bankcard to a consumer. When a purchase is made the issuing, bank makes payment to the acquiring bank and the consumer is responsible for repayment.
Card Associations - These institutions are not banks or card issuers, they act as a governing body for the financial institutions involved in payment processing and provide a network for information to be transmitted between members.
What Actually Happens?
There are two main processes involved, authorization and settlement. Today, authorization occurs within a matter of seconds and settlement in several hours. Something unfathomable just a few short years ago when settlement may have taken several days.
Authorization begins with the card holder presenting their card at the point of sale, whether in person or online. Using a terminal, the merchant sends the card information in the form of an authorization request to the processing company. The processing company sends the information through the card association networks to the issuing bank. The issuing bank verifies the request information, account balance, and account standing before approving or denying the request. Once approved (or not) the issuing bank sends the information to the acquiring bank via the card network. The acquiring bank sends authorization information to the terminal where the transaction occurs, and the information is saved until a batch is ready for settlement.
Settlement is the process that occurs when a batch of authorizations are sent from the merchant to the payment processing company. The acquiring bank then sends the transaction details to the issuing banks via the card network. The card association debts the issuing banks account the net transactions and credits the acquiring bank the total amount. The credit is deposited into the merchant's account per the agreement between merchant and acquiring bank. The issuing bank has paid the debt of the cardholder, who in turn is required to repay the debt as well as fees or interest accrued.
What About Fees?
During the credit card payment process there are various fees incurred that are paid to the processor by the merchant. Depending on the kind of merchant, finding a reputable company that will provide the services necessary without overcharging can be difficult. If you are a high risk merchant account, it's important to find companies that specialize in high risk accounts like DoubleHelix because they are equipped to handle high risk accounts without using shady business strategies that may look appealing but cause issues in the future. The fees occur in three types:
Interchange - The fee structure that is paid to issuing banks typically in the form of a percentage and a transaction fee. This is industry wide and non-negotiable.
Assessments - The fee structure that is paid to card associations and is uniform for processing companies. This is industry wide and non-negotiable.
Markup - The fee structure that is paid to the processing company. This must cover all expenses and profit for the processing company. This is negotiable to a point.
Interchange and assessments are standard across the industry and should total 75-80% of total fees incurred. The markup is specific to each company and should total 20-25% of the total cost. This is a generalization, but there is obviously an issue if the ratio is closer to 50:50. Be an informed consumer and enjoy the confidence knowledge brings to the business world.