Credit card processing is generally referred to as the activity that enables your business’s sales data to be interpreted into an electronic format for credit card companies. The transaction processing function of a Point of Sale (POS) system, for example, is considered part of the payment processing network; however, there are numerous other ways in which businesses can accept payments from customers.
When a customer uses a credit card to pay for a purchase at your business, the customer will swipe his or her card through a special terminal that reads the magnetic strip on the back of the card and sends this information over a phone line or an internet connection directly to your merchant bank.
This is also referred to as dialing the payment card industry (PCI) or the M.O.S.S (Merchant Order Processing System). This data is sent to a computer system at your business called an acquirer, and the acquirer relays this information to an appropriate network such as Visa, Mastercard, Discover or American Express.
The credit card company or network will then provide the acquirer with an approval, decline or adjustment response within a few seconds. Only after receiving an approval from the credit card company does your business’s Point of Sale (poS) system receive notification and update its records to show that the customer has paid for his or her purchase.
Credit Card Processing Fees
Setting up electronic payment acceptance for your business is not free, but it can be less expensive than installing and maintaining a traditional cash register system. There are several factors that will influence the cost of credit card processing through your business’s merchant account. While there are various pricing models of fees that you might be charged as an independent business owner, most business owners are familiar with the interchange plus pricing model.
Interchange Plus Pricing Model
The Interchange Plus pricing model allows you to recover some of your credit card processing fees by charging customers a flat rate for using their cards. The merchant bank that you have partnered with will charge this fee, which is then shared between them and any other third party that handled a part of the transaction. Because this is a per-transaction fee, it is often cheaper than an alternative pricing model, such as tiered or percentage-based fees.
In addition to the flat rate for each transaction with your business’s merchant account, you will also be charged a monthly service fee by your merchant account provider. This is a standard practice in the industry and is usually applied to all business owners and merchants receiving interchange plus pricing discounts.
Answering Frequently Asked Questions
When considering credit card processing for your business, you may not be aware of what fees you will be charged for this service. For an overview of how credit card processing fees are structured, please refer to the following list of frequently asked questions.
What is an authorization?
An authorization is a request for approval sent from your credit card processing company to the bank that issued the payment method used in each transaction. The term “authorization” can be interchangeable with the term “pre-authorization.”
What is a processing network?
Processing networks are trusted third parties that facilitate the transmission of information between your business’s merchant account and the credit card companies. The most common payment processing networks include: Visa, Mastercard, Discover, American Express and JCB. According to the Federal Reserve Bank of Philadelphia, there are over 130 different processing networks in the United States alone.
What is interchange?
Interchange fees are one of the most common types of credit card processing fees that you will encounter as a merchant. This fee is paid to your business’s acquirer by the issuing bank of each payment method used for transactions with your business. Interchange is the fee that credit card companies charge when a transaction occurs. This fee is paid for authorizing, clearing and settling the transaction between merchants and issuing banks.
What are interchange plus fees?
Interchange plus fees are common credit card processing fees in which your business’s merchant account provider charges you an additional flat fee each time you accept a specific payment method. These fees are contractual and agreed upon by your merchant account provider and the bank that issues the relevant card brand.
What are processing rates?
Processing rates are usually expressed as a percentage of each total transaction processed through your business’s credit card processing service provider. Your business’s merchant account provider will charge you this fee as a way to generate revenue. These rates are typically expressed as an additional percentage each time you accept payment through your merchant account.
What is the convenience fee?
The convenience fee is an industry term that refers to any fee that you must pay outside of your standard credit card processing fees. This includes application, set-up, equipment and annual fees. Depending on the company you choose to work with for your credit card processing needs, you may also be charged transaction fees, monthly service fees or statement fees.
