Posted By Performance Card Service on 02/14/2017 Financial

Credit Card Processing Guide

By: Matt Wollersheim

Credit Card Processing Guide

A credit card processing guide & infographic help you make sense of the credit card processing landscape with an overview of how payments processing works. 

Modern credit card processing is incredibly fast, with most transactions taking only seconds to complete. Yet despite this speed, there are many steps and parties involved with each card-based sale.

In addition, merchants must factor in a host of other considerations like processing fees, pricing models, and even funding schedules. Understanding how all these components fit together makes it much easier to ensure:

  • A secure shopping experience for your users.
  • Sustainable and profitable growth for your business.

What follows is a quick overview of how credit card payment processing works.

1. The Parties Involved

Every successful sale involves key players working in concert. The most important actors include:  

  • Customers — those who initiate transactions by swiping their cards or clicking the “buy” button.
  • Merchants — the company selling whatever goods and services customers want to buy.
  • Card associations — Visa, MasterCard, American Express and the other big-name card brands.
  • Issuing banks — the financial institutions that provide consumers with credit cards.
  • Credit card processors — the intermediaries responsible for passing on authorization requests between merchants and the card associations.
  • Merchant account providers — the organizations responsible for securely processing each credit card transaction.
  • Payment gateways — the web-based POS terminals that digitally capture payment data during the online checkout process.

Though how do these actors interact behind the scenes?

2. The Anatomy of a Card Transaction

You probably already know at least some of the following steps. However, below is a quick outline of what happens whenever customers swipe their plastic or fill out a checkout form:

  • Step 1: The merchant’s POS reader or payment gateway captures the card data.
  • Step 2: The merchant then sends this payment information to the credit card processor.
  • Step 3: The processor relays this payment information to the card association (e.g., Visa or MasterCard).
  • Step 4: The card association connects with the issuing bank to verify the legitimacy of the transaction.
  • Step 5: The issuing bank approves (or declines) the sale.
  • Step 6: Whether the transaction is successful or not, notifications are sent back down the chain to all relevant parties.

Although the above workflow applies to most credit card sales, the fees involved can vary considerably.

3. Understanding Credit Card Processing Fees

Most processing fees fall into one of three categories:

1. Transactional

These fees happen whenever a transaction goes through:

  • Interchange reimbursement fees are usually a percentage of each sale (the wholesale rate) plus a flat fee (the markup).
  • Assessment fees are typically based on a percentage of each merchant’s total transactional volume for the month.

2. Flat Fees

These fees exist independently of transactional volume, meaning they remain the same from month to month. Some of the charges in this category include:

  • Equipment rental and payment gateway fees
  • PCI compliance fees
  • Annual and monthly fees
  • Setup and network fees

3. Incidental Fees

These charges only exist on a case-by-case basis, meaning they’re triggered by specific events, including:

  • Chargebacks and Refunds
  • Retrievals and disputes
  • Non-sufficient funds
  • Card-not-present verifications

How the above fees are applied ultimately depends on the pricing model that your processor uses. Also, for high-risk merchants, there will usually be a reserve of 10%.

4. Common Pricing Models

Although there are countless options out there, below are the four most popular ways that processors price their services:

  • Interchange plus: Itemized pricing that clearly separates wholesale rates from their markups.
  • Subscription: Monthly (or annual) pricing that charges wholesale rates plus a flat, ongoing fee.
  • Tiered: Similar to interchange plus pricing, although merchants are segmented into different tiers based on their size, volume and risk factor.
  • Blended: Also known as “flat” pricing, this model uses a consistent fee for all sales — regardless of volume.

Knowing how much you pay every month is important, but so is knowing how quickly you get paid.

5. Funding Schedules

Although most merchants can expect transactions to clear within two business days, some credit card processors offer next-day deposits. What’s more, certain “high-risk” merchants may have to wait for one to two weeks for their funds to clear.

If cash flow is important for your business, it’s worth shopping around for payment processors that can guarantee faster-than-average settlements.

Putting It All Together

Making sense of the credit card processing landscape can seem overwhelming. There’s a lot to take in.

However, the following infographic provides a top-level overview of how the components work together. Use this free resource as a reference as you begin exploring payment processing solutions for your business.

Click on the Infographic below to download or print.

Credit Card Processing Guide


Author bio: As Vice President of Sales at Performance Card Service, Matt Wollersheim's focus is on client relations, general marketing and development of new processing channels. Performance Card Service is a high-risk merchant account provider. 

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