Credit card processing is a complicated thing. And it\u2019s just one of the dozens of complicated things that small business owners have to figure out. This means it\u2019s too often put on the back burner or ignored entirely.<\/p>\n
While we can\u2019t really blame you for not prioritizing processing, there are some things that business owners should be paying attention to. Remember, processing costs are inevitable, but rates vary and it\u2019s possible to reduce the total amount that you\u2019re paying in processing costs each year.<\/p>\n
In this post, we\u2019ll go over some of the basics of credit card processing and look at ways that businesses can save some money and help out their bottom lines.<\/p>\n
What Is Credit Card Processing?<\/strong><\/p>\n Credit card processing is also commonly referred to as merchant services. This provides businesses with the ability to accept credit and debit card payments. Such payments might be swiped on a traditional credit card machine, dipped into an EMV portal, keyed into a physical machine or eCommerce payment portal, or tapped on a contactless credit card reader.<\/p>\n Credit card processors facilitate communication between all parties involved in this process. They also ensure adequate security for the transaction.<\/p>\n Businesses must pay a fee for this service. Processing fees are assessed with each transaction and deducted from the payments received by the merchant.<\/p>\n What Are the Steps Involved in a Credit\/Debit Card Transaction?<\/strong><\/p>\n Each credit card transaction goes through a remarkable process. And it does so in a matter of seconds.<\/p>\n First, a customer makes a purchase at a brick-and-mortar or eCommerce store. Once they enter their credit\/debit card information, it\u2019s transmitted from the merchant\u2019s machine through the processor.<\/p>\n It simultaneously goes to two different parties: the appropriate card network and the issuing bank. The card network assesses an interchange fee based on the risk of the transaction. The issuing bank determines if the customer has sufficient funds to make the purchase.<\/p>\n Once determined, the issuing bank sends an approved or declined message back to the credit card terminal.<\/p>\n At the end of the business day, the merchant can batch all payments. This means that all payments since the prior batching will have their processing fees deducted and the remainder deposited into the merchant\u2019s bank account referred to as the acquiring bank.<\/p>\n What Parties Are Involved in Credit Card Processing?<\/strong><\/p>\n Customer<\/strong>: Without the customer, no purchase is made.<\/p>\n Merchant<\/strong>: With the merchant, the customer has nowhere to make a purchase.<\/p>\n Processor<\/strong>: The credit card processor is responsible for setting the merchant up with PCI compliance and making sure that all communication of every transaction is seamless.<\/p>\n Card networks<\/strong>: Also known as card associations, these organizations are responsible for setting and assessing the interchange rates. The card networks are familiar names: VISA, American Express, etc.<\/p>\n POS system<\/strong>: The POS system<\/strong><\/a> provides the merchant with the credit card terminals and point of payment hardware to allow businesses to make a physical transaction.<\/p>\n Issuing bank<\/strong>: The customer\u2019s bank determines if any transaction is legitimate or not.<\/p>\n Acquiring bank<\/strong>: The merchant\u2019s bank accepts the final payments after everything has been batched.<\/p>\n What Are the Fees of Credit Card Processing?<\/strong><\/p>\n The fees are where things can get complicated for businesses. Some merchant service providers are more transparent than others. And those with lower transparency will have more complicated fees. In reality, though, the fee system should be pretty simple.<\/p>\n Interchange Fees<\/strong><\/p>\n The interchange fees make up the majority of all credit card processing costs. Again, these fees are assessed by the card networks and passed along to the merchant.<\/p>\n The majority of these fees are distributed to the issuing banks for their assumed risk or releasing the funds.<\/p>\n The final total of these fees is based on the inherent risk of the transaction. Transactions that are deemed higher risk will come with a larger interchange fee. Risk is calculated based on a number of factors, including the type of card being used, the way that a payment was made, and the retailer\u2019s industry niche.<\/p>\n Assessment Fees<\/strong><\/p>\n The card networks also get a small portion of the interchange fees. These constitute a fraction of a percent of the total. These fees are paid for the card networks\u2019 role in regulating the industry.<\/p>\n Processing Fees<\/strong><\/p>\n The processor also collects a small portion of the total fee for providing communication and security to all transactions. Ideally, these fees are clearly enumerated on merchants\u2019 statements. Interchange plus pricing, for instance, clearly breaks down exactly how much is going to the interchange and assessment fees versus how much is going to the processor.<\/p>\n Hidden\/Additional Fees<\/strong><\/p>\n Those that don\u2019t use interchange-plus pricing likely bundle in some additional fees. These might include fees for chargebacks, PCI compliance, hardware costs, batching surcharges, card minimums, late penalties, and more. Of course, these are unnecessary and it\u2019s best to avoid such fees.<\/p>\n Can You Lower Your Credit Card Processing Fees?<\/strong><\/p>\n Though it\u2019s impossible to completely avoid paying some credit card processing fees, there are some easy ways to trim the fat and reduce the final amount you\u2019re paying.<\/p>\n Audit Your Processor<\/strong><\/p>\n Start by speaking with your processor and getting a full breakdown of your current processing payments. Get a rate comparison<\/strong><\/a> from competing merchant service providers to see how much you could save.<\/p>\n Switch POS Systems<\/strong><\/p>\n Some POS providers lock businesses into a single credit card processor. This often comes with inflated rates and long-term contracts. If possible, switch to a point of sale system that is processing agnostic. This means that they allow their users to use any processor of their choice.<\/p>\n Minimize Your Interchange Rate<\/strong><\/p>\n Businesses can also take steps to reduce the interchange fees assessed on any transactions. These might include requiring minimum purchase amounts, refusing to accept certain card brands, or refraining from keying in transactions manually. All are associated with higher risk and therefore pad the total interchange fees.<\/p>\n