Small Business Credit Card Processing
What is Small Business Credit Card Processing?
Most small businesses need to accept credit cards as payment in order to stay competitive. However, this means they need to choose a credit card processor (also known as a merchant account provider) to process credit cards. Although the process can be confusing and tricky, read below to learn the basics.
Two Parts to Processing
There are two distinct parts which make up credit card processing: Authorization and Settlement
Authorization
The fascinating part of this process is that it takes ~2 seconds for an online transaction and about 15 seconds for a dialup transaction:
1. Cardholder presents the card (or the card number, expiration date and security code) to the merchant.
2. The Merchant communicates the card data to their Merchant Account Provider. They use either a credit card terminal, a POS system communicating over the internet or, in the case of an online transaction, a payment gateway, to communicate that data.
3. The Merchant Account Provider communicates the card information to the VISA or Mastercard network. Usually this is done via an intermediary, a larger Payment Processor.
4. Mastercard or VISA asks the cardholder’s bank (these days usually a credit-card specialist) if the funds are available. If the funds are available, the transaction is authorized and the money placed on hold in the shopper’s account.
5. The issuing bank tells VISA / Mastercard what the result of the transaction was (either Authorized or Declined).
6. VISA / MC communicate the result back to the Merchant Account Provider.
7-8. The Merchant gets the result and exchanges goods with the shopper.
Settlement
9. At the end of the day the Merchant sends the day’s “batch” of transactions to the Merchant Account Provider. If the merchant is using an Online Gateway or an IP-based terminal the batching is probably done automatically and is never really noticed by the merchant. If using an older dialup terminal the merchant probably has to hit a special button to initiate this process.
10-12. The merchant account provider sends the results to Visa / Mastercard.
13. The Issuing bank adds the amount to the cardholder’s bill – the merchant no longer concerns themselves with the cardholder, unless there is a Chargeback or a Refund, because they will get paid no matter what. Collecting from the cardholder is the Issuing Bank’s responsibility.
14. The Issuing bank transfers the money to the Merchant Account Provider, using an ACH (Automated Clearing House) transfer.
15. Your Merchant Account Provider deposits (again using ACH) the proceeds into your business checking account.
How Does this Apply to Small Business?
Small businesses often get the short end of the stick when it comes to processing. Make sure that you stipulate only interchange plus pricing when negotiating with your processor. Interchange plus is the most transparent form of pricing for small businesses—you are charged interchange plus a constant processor markup.
How to Choose a Credit Card Processor
One of the best ways to ensure that you are getting the best deal on rates for credit card processing is to comparison shop. This way, you can be a much more knowledgeable shopper and negotiator. The easiest way to comparison shop is to use FeeFighters.com.
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