December 23, 2019

Payment Processing

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Accepting credit cards involves a lot more than swiping a card and receiving payment. What goes on behind the scenes is called payment processing. Learn how it works and how to choose the right vendor in our guide.

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How Does Payment Processing Work?

A payment processor "talks" to your credit card terminal, the card network (Visa, Mastercard), and the issuing bank. Here's how it works:

  1. A customer pays for the transaction, either in person, over the phone, or online.

  2. The payment processor transmits the data from the terminal to your merchant bank.

  3. The merchant bank requests approval from the card network.

  4. The card network requests approval from the issuing bank after verifying the card's legitimacy.

  5. The issuing bank decides and sends a response back to the merchant bank.

  6. The payment processor then transmits this data to the credit card terminal.

At the end of each day, you send in the batched sales. The customers' accounts will get charged and you receive funds within a couple of days.

Payment Processing Roles

Here's a closer look at the entities involved in every credit card transaction.

Merchant Bank
A merchant bank will collect your credit card payment sales. You can apply for your own merchant account or choose an aggregated account, which means you share a merchant account with hundreds of other merchants.

Card Network
Visa, Mastercard, Discover, and American Express are the four networks. Discover and American Express serve as the network and the issuer. That means they process and approve transactions.

Visa and Mastercard, on the other hand, are solely networks. They partner with other banks that issue the cards. Visa and Mastercard just validate the transaction and pass the information along to the card issuer.

Card Issuer
An issuing bank or card issuer determines if there are adequate funds to approve the transaction. The issuing bank processes the batch payments and pays the acquiring bank/merchant. The card issuer also collects payment from the customer.

How long does it take for a credit card payment to process?
Each payment processor has different turnaround times and batch processing cut-off times. But on average, you'll have the funds within 2–3 business days.

At the end of business each day, you send in approved transactions to the credit card processor. The processor then contacts the appropriate issuing banks to receive payment. Then, the processor sends payment to your merchant account.

What Does Payment Processing Cost?

Payment processing costs depend on the method of payment. Swiped transactions cost between 1.5% and 2.9% per transaction. Keyed-in transactions cost an average of 3.5% per transaction.

The cost is a combination of:

  • Wholesale rates charged by the networks
  • Markup rates charged by the payment processor

Interchange Fees
Visa, Mastercard, American Express, and Discover charge a percentage of each transaction. These fees are non-negotiable. Each network predetermines the fees based on the type of card (e.g., standard card vs reward card) and the method of payment (swiped or keyed-in).

Markup Fees
The payment processor adds its own fee to each transaction. You can negotiate these fees. They typically charge a percentage plus a fixed amount, such as 0.3% plus $0.15. This means you pay 0.3% of every transaction amount plus a fixed $0.15 per transaction.

Monthly Fees
Some payment processors charge monthly fees. It's typically a flat fee that you can predict each month, such as $10/month. Processors may also charge:

  • Monthly equipment fees
  • PCI compliance fees
  • IRS reporting fee (which is uncommon)
  • Statement fees

Variable Fees
Read the fine print of each agreement to determine the variable fees. Some processors charge fees for incidentals, like chargebacks or non-sufficient funds (NSF) transactions.

Choosing the Right Payment Processor

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The best payment processor for your business depends on your needs and size. If you're a small business, you could skip a dedicated payment processor altogether. Keep reading to learn more.

Payment Services Provider

Payment service providers (PSPs), including companies like Square, Stripe, and Shopify Payments, give you everything you need to start collecting credit card payments right away. For this reason, many small businesses prefer to use them.

PSPs are aggregate accounts. That means you don't have an individual merchant account. You also don't need your own payment processor.

Approval only takes a few minutes. Once you enter your personal information, you can accept credit cards via your virtual, or online, terminal. You can also order a credit card reader that attaches to your computer, phone, or tablet.

Payment Processor

You will want a payment processor in addition to your merchant account if you:

  • Are a high-risk business
  • Process a large amount of monthly sales
  • Just want the stability of your own account

Read on to learn what to look for when choosing a payment processor.

Transaction Fees
Be aware of any transaction fees that the processor charges. You'll need to know whether they use interchange-plus, flat rate, subscription, or tiered pricing before committing.

Setup Fees
Some companies charge application and setup fees. Know the costs ahead of time so you can compare options.

Gateway Fees
This separate charge only applies if you accept online payments. The gateway transmits the data from your terminal to the credit card issuing bank. If you need an online payment gateway, there may be additional fees.

Monthly Minimum Fee
Ask about the monthly minimum sales requirement. Some processors require a certain amount and if you don't reach it, you'll pay a penalty.

Early Termination Fee
Some companies charge if you cancel prior to the contract's expiration date. These fees can get hefty, so pay close attention.

PCI Compliance Fees
Processors might charge an extra fee to manage your PCI compliance for you. While this is imperative, the fees vary by company.

The Top Credit Card Processing Companies

Square offers the pay-as-you-go format. They don't charge a monthly fee. Instead, you pay:

  • 2.6% plus $0.10 per in-person transaction
  • 3.5% plus $0.15 per card-not-present transactions
  • 2.9% plus $0.30 per ecommerce transaction

Square offers a free magstripe reader for mobile processing and a variety of equipment options, including a chip reader and Square Register.

Payline Data
Payline Data provides you with a dedicated merchant account. You get your own merchant ID and they even offer accounts for high-risk businesses.

What makes a merchant high Risk?
High-risk merchants all look different, but these factors could contribute:
  • Numerous Chargebacks
  • Low Credit Score (Personal or Business)
  • Out-of-the-Country Headquarters
  • High Item Costs
  • Minimal Years in Business

You can purchase a variety of credit card terminals, and include a virtual terminal as well as a payment gateway. This allows you to accept in-person, online, and keyed-in transactions.

Payline Data charges:

  • 0.2% plus $0.10 per card-present transaction
  • 0.4% plus $0.20 per card-not-present transaction

Each Payline Data package has a monthly charge as well as a monthly minimum. They are transparent in their pricing and requirements, though.

Dharma is a good choice for high-volume retailers bringing in at least $10,000 per month. It offers:

  • Month-to-Month Contract
  • Interchange-Plus Pricing
  • Flat Monthly Fee

Mobile processing and a virtual terminal are both included in each package.

Dharma is also transparent in their pricing. They don't charge PCI compliance fees, AVS (Address Verification System), or batch fees. The company has special plans for each type of operation, including retail, restaurant, and virtual.

Bottom Line

Choosing a payment processor is an important decision. Look at the features and pricing structure of each processor carefully.

If you're a small business just starting out, programs like Square will typically suffice. You'll get credit card processing without over-complicating things. Once your company grows, you can consider larger merchant account providers, such as Payline Data or Dharma.

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