Credit Card Processing 101: Everything You Need To Know

According to various financial industry surveys and studies, approximately 80% of American consumers prefer card payments over cash, and only 10% of consumers continue to make all of their purchases with cash. Additionally, the Federal Reserve Board says debit, credit or gift cards now makes up two-thirds of all payments not made by cash.

In short, if you’re not taking credit cards and/or other forms of digital payments, you’re not optimizing the customer experience to the extent you could and selling yourself short on revenue. So what is credit card processing, how does it work and what are some of the key things to consider?

Accepting credit cards and other forms of digital payments doesn’t have to be difficult or complicated. Ultimately, credit card processing should serve as a propeller, and not an anchor, for your business. Deployed and executed properly, credit card processing is a catalyst for providing your customers with more ways to interact with your business, increasing their loyalty and satisfaction and providing insight into your business so you can increase revenue and market share.

How Credit Card Processing Works: The Key Players

The key players involved in authorization and settlement are the cardholder, the merchant, the acquiring bank, the issuing bank, and the card associations.

Cardholder (Consumer)

A cardholder is someone who obtains a bankcard (credit or debit) from a card issuing bank. They use that card at a business to products and/or services.

Merchant (Business)

Technically, a merchant is any business that sells goods or services, but in this case, a merchant that accepts cards as a form of payment. A merchant is any business that maintains a merchant account that enables them to accept credit or debit cards as payment from customers (cardholders) for goods or services provided.

Acquiring Bank (Merchant’s Bank)

An acquiring bank is a registered member of the card associations (Visa and MasterCard). An acquiring bank is often referred to as a merchant bank because they contract with merchants to create and maintain accounts (merchant accounts) that allow the business to accept credit and debit cards. Acquiring banks provide merchants with equipment and software to accept cards and handle customer service and other necessary aspects involved in card acceptance. The acquiring bank also deposits funds from credit card sales into a merchant’s account.

Many merchants don’t recognize their acquiring bank as the primary provider of their merchant account. Acquiring banks are playing an increasingly hands-off role as the bankcard system evolves. Acquiring banks often enlist the help of third-party independent sales organizations (ISO) and membership service providers (MSP) to conduct and monitor the day-to-day activities of their merchant accounts.

Issuing Bank

An issuing bank issues credit cards to consumers. The issuing bank is also a member of the card associations (Visa and MasterCard). Issuing banks pay acquiring banks for purchases that their cardholders make. It is then the cardholder’s responsibility to repay their issuing bank under the terms of their credit card agreement.

Card Associations (Visa and MasterCard)

Card associations aren’t banks and they don’t issue credit cards or merchant accounts. Instead, they act as a custodian and clearing house for their respective card brand. They also function as the governing body of a community of financial institutions, ISOs and merchant service provider that work together in association to support credit card processing and electronic payments.

Their primary responsibilities are to govern the members of their associations, including interchange fees and qualification guidelines, act as the arbiter between issuing and acquiring banks, maintain and improve the card network and their brand.

4 Reasons Why Credit Card Processing/Digital Payments Is Critical To Your Business

For consumers, the benefits for using credit cards are as diverse as they are lucrative. From rewards for everyday transactions to racking up points or miles, it often makes sense to use them. Overall, it doesn’t cost any more to make a purchase with your credit card vs. a debit or credit card.

As a business owner, there are just as many perks to accepting credit cards, and the pros almost always outweigh the cons. Here are just a few of the reasons why businesses that don’t already provide credit card payment options at checkout should.

Attract A Larger Customer Base

In a digital world, not accepting credit cards significantly limits your customer base. Just 26% of transactions are paid using cash, and typically for purchases of $10 or less. With so many customers using their cards, adding this option ensures you don’t lose business. Accepting credit cards also allows you to expand your product and service offerings online. Ultimately, you can increase your customer base both in-person and virtually.

Customer Convenience

Providing credit cards is a convenience for both your business and for your customers. Consumers can enter your store knowing they can purchase items regardless of the amount of cash they have. Likewise, your business can establish a system for accepting cards that simplifies accounting/bookkeeping, backend inventory management processes, provide analytics and insight into revenue streams, and more.

Boost Sales

A consumers cash budget is typically very different from their available credit. The average cash transaction, for example, is $22. Meanwhile, the average non-cash transaction is $112. Don’t cut sales and revenue short because you haven’t added credit card processing to your business model.

Accelerate And Improve Cash Flow

For many businesses, there is a gap between when a customer purchases their product/service and when their business receives payment – a cash flow gap. When you accept credit cards, the transaction is processed and settled quickly. To that end, ensure you partner with a credit processing company that provides near real-time processing.

Credit card processing provides additional benefits to grow and expand. Perhaps the most beneficial aspect of credit card processing is the ability to take your business online. While a majority of purchasing and shopping still takes place in brick-and-mortar locations, online sales continue to grow year over year. Being able to process sales online is vital to the success of your business and without a merchant account you won’t be able to take part in this rapidly growing sector of commerce.

Ultimately, the benefit of merchant accounts with credit card processing is the overall growth of your business. The last thing you want is for your business to remain static, or worse, decline. You want robust growth. Accepting credit, debit and payment cards is the easiest way to ensure your business continues to grow.

Credit card processing streamlines your checkout procedure both in-store and online. It provides visibility into customer transactions, provides insight/analysis into revenue streams and allows you to tailor your business and/or cross-sell and up-sell new services and products. Customers are more satisfied with the options in payment when you have a merchant account that can process credit cards. Finally, credit card processing immediately gives your business a more “professional and trustworthy” image and/or brand.

How To Pick The Best Credit Card Processing Company

Payment processors are not a one-size-fits-all, so properly research and crunch the numbers to see which payment processor will meet your needs and earn you the greatest dividends. Here are the best steps to take so that you choose the right credit card processor for you. 

  1. Third-Party or Merchant Account?

Third-party processors handle the credit card transactions outside of your store or application. They might charge slightly higher transaction fees, but you won’t need to worry about PCI compliance or integrations.

Merchant accounts are used when the business wants credit card payments to take place within its own network. It involves some underwriting and implementation is more complicated, but it allows for better control and customer service. 

  1. Superior Customer Service

How often do you encounter special requests, problems, or complications that require the attention of your credit card processor? Difficulties with credit card payments can lose customers, so it’s important to consider the various levels of customer service provided by your payment processor. Ask questions about support, availability, protections, and how much control you’ll have over customer payments and payment portals. 

  1. Research POS, Mobile, And Online Features

Some modern companies rely solely on e-commerce, and some process the majority of their transaction via a virtual terminal. Other businesses need fast and reliable credit card payments for point-of-sale (POS) transactions. You might need a combination of the three. Look carefully at the way your customers shop and look for payment processors that specialize in the methods you need.

  1. Assess Security and PCI Compliance

Every consumer has a right to secure payment processing that protects their data. You need to work closely with your credit card processor to ensure that operations are secure and PCI compliant. Be sure that any POS terminals or online payment portals allow for encryption of data to protect both you and your customers. 

  1. Investigate Transparency

Communication and transparency are key indicators of a healthy business relationship. As you assess different payment processors, look for the degree of transparency in their pricing models and how clearly they communicate with you as you ask questions about their service.

  1. Crunch The Numbers

Just because a flat-rate model is easier to wrap your brain around doesn’t mean it’s the most lucrative option for your business. More complicated pricing models may save you money in the long run, as well as give you better flexibility and increased benefits such as rewards and spend tracking. 

Consider having a potential payment processor run their various pricing models with your last month’s transaction numbers. With those simulations you should get a better idea of what each payment processor could look like with your business. You may be surprised that a monthly subscription with a flat rate would cost you more than a higher rate, or visa versa depending on your business.

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