card payment processing methods steps fees

Card Payment Processing- Methods, Steps & Fees

As shopping and transaction preferences evolve, companies must be able to adapt and accept multiple forms of payment across various sales channels. While customers traditionally made purchases in-person with cash, many consumers today prefer shopping online with credit and debit cards.

Card payment processing technology now enables businesses to complete card transactions in-store, online, and via mobile apps.

How Does Credit Card Processing Work?

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There are five key players involved in credit card processing-

  • Cardholder
A cardholder is someone who owns a credit or debit card from a financial institution. Consumers can present this card at a business to purchase goods and services.

  • Merchant
A merchant is any company that offers goods and services, but in this case, they must also accept credit card payments. Therefore, merchants must also open a merchant account that allows them to retrieve funds from cardholders.

  • Acquiring bank
The acquiring bank, also referred to as the merchant's bank, is a member of a card association, such as Visa and Mastercard. They are called merchant banks because they enable businesses to open an account to accept credit and debit cards.

Typically, acquiring banks lend companies the hardware and software necessary to accept cards, such as payment terminals. The merchant bank also handles the fund transferal from the customer's bank to the business's account.

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  • Issuing Bank
The issuing, or cardholder's, bank provides consumers with their credit cards. The issuing bank, like the acquiring bank, must also be a member of card associations.

Issuing banks pay acquiring banks for all purchases made by their cardholders. After the initial payment, cardholders are then responsible for repaying their bank within the terms of their agreement.

  • Card Association
Card associations, such as Visa and Mastercard, are not considered issuing banks, as they do not actually give cardholders their cards directly. Instead, they are the governing body over communities of financial institutions that handle credit card processing and electronic payments.

A card association is responsible for assuring their members abide by qualification guidelines, including interchange fees. They must also maintain their brand and the card network to improve profitability. Visa uses their own VisaNet network to exchange data between members, while Mastercard uses Banknet.

Credit Card Payment Acceptance Methods

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There are several types of hardware and software that enable businesses to accept card payments, including-

Payment Terminal

A payment or credit card terminal is the traditional method businesses use to accept card payments.
A terminal allows customers to swipe, insert, and manually enter card information to complete transactions. Modern payment terminals also have near field communication (NFC) technology, enabling customers to make mobile and contactless payments.

Point-of-Sale System

A point-of-sale (POS) system generally uses software to orchestrate a transaction while recording inventory quantities, customer information, and employee activity. Many businesses use POS software for sales, inventory, and customer management. Depending on the solution and type of business, POS systems can also handle appointment and staff scheduling.

Mobile Payment

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Mobile payments are purchases completed by smartphone and mobile card readers. Consumers can now store their billing information in a digital wallet on their phone to streamline transactions. This enables customers to make contactless payments via a mobile app or simply by hovering their phone over the payment terminal.

Virtual Terminal

A virtual terminal is a type of software that enables companies to accept card payments through their tablet, laptop, or desktop computer. By connecting an external card reader, virtual terminals can conduct card-not-present and card-present transactions.

Online Payment Processing

With online payment processing, businesses can extend their sales channels digitally, allowing customers to make online payments. An online payment processor can be implemented on an e-commerce website and mobile application through a virtual shopping cart or separate payment page.

How do Credit Card Transactions Work?

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After a customer swipes their card, there are several processes that occur within a matter of seconds-

1. After the merchant runs a customer's credit card, the data is sent to the processing company for authorization.

2. The payment processor then transfers the data to the card network and the customer's financial institution. The bank will run their approval process and send the results back to the processor.

3. Once the processor receives the approval or denial, they relay the message back to the payment gateway.

4. Now, the settlement network transmits the information from the customer's bank to the acquiring bank. The acquiring bank then returns the approval to the merchant's payment application.

5. Lastly, the acquiring bank conducts an interchange for each sale with the cardholder's bank. This requires the cardholder's bank to transfer the sale amount, minus the interchange fees, to the acquiring bank. The acquiring bank then deposits the funds into the merchant's account, minus the discount fee.

Pricing Models

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Credit card processing companies use various pricing models to calculate their fees and rates. The primary pricing models include-

Flat-Rate Pricing

The flat-rate pricing model fixes rates, such as card processing fees, so businesses do not have to worry about price fluctuations. This makes flat-rate pricing ideal for companies with relatively low sale volumes. However, although flat-rate pricing takes the guessing out of processing fees, it is typically more expensive than other models.

Cost-Plus Pricing

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The cost-plus pricing model, also known as interchange-plus pricing, provides companies with an itemized cost breakdown. The breakdown typically outlines interchange rates and the processor's margin.
There is also a cost-plus hybrid model where providers require a monthly fee with reduced interchange-plus fees per transaction. Therefore, the more transactions a business completes, the more they save.

Tiered Pricing

The tiered pricing model classifies each credit card transaction as either qualified, mid-qualified, or non-qualified. The classification determines how the transaction fees are calculated. This makes it difficult to understand how transactions are categorized and formulated.