Accepting payments from customers is the backbone of your business's revenue. Modern payment processing tools make it simple for businesses to set up online and in-person credit card processing. However, while business owners no longer need technical know-how to accept credit card payments, not understanding credit card processing and how it works leads to payment shortcomings. Likewise, it results in many business owners overpaying for credit card transactions.
This guide explores processing credit cards, the participants in the process, the factors to consider when choosing a payment processor, credit card transaction fees, and a range of related topics. Read ahead to become an expert on modern payment processing!
Processing credit cards is the electronic handling of credit card transactions. It involves the authorization, authentication, and settlement of payments. Credit card processing enables businesses to accept payments from customers using credit cards, ensuring payment convenience for customers and staff members. Modern payment processing offers efficiency, speed, and security. It enables swift transactions, reducing processing times. Enhanced security features like encryption and tokenization protect sensitive information, and integration with digital platforms fosters seamless transactions, improving user experience.
While credit card payments occur almost instantly, behind the scenes is a complex network of stakeholders responsible for performing various tasks to ensure the transaction runs smoothly. The transaction process is automated and occurs without manual input, but to fully understand how payment processing works, it's essential to know which stakeholders are involved. Below, let's explore who is involved in the process:
While credit card transactions feel instantaneous to merchants and customers, they involve a multi-stage process. Below, let's explore the three stages of credit card processing in more detail:
The authorization stage of payment processing involves verifying if a transaction is valid and whether a customer has the available funds for a purchase. This process involves the payment processor requesting approval from the issuing bank. If the issuing bank communicates that the transaction is invalid or the customer doesn't have sufficient funds, the transaction will decline.
Next, it's time to confirm the identity of the cardholder. Credit card processors will use security measures, such as CVV, zip code confirmation, and more, to determine whether the cardholder is the individual purchasing the product or service. Again, the transaction will decline if the authentication process fails due to incorrect information.
Lastly, it's time to finalize the transaction and transfer the funds. The payment processor submits approved transactions for payment and funds transfer from the issuing bank to the business's merchant account.
To accept credit card transactions, businesses require hardware and software to facilitate the process. Below, let's explore the various types of credit card processing equipment and software your business may want to consider:
Point-of-sale (POS) systems are an all-in-one solution for accepting in-person payments. In decades past, POS systems were simple cash registers, but modern systems involve advanced software, credit card payments, and other modern payment solutions. POS systems allow businesses to accept payments, track customer order history, offer rewards, and more. Some POS systems run on traditional computers or tablets (such as PCs and iPads), while others have dedicated hardware supplied by the POS provider.
If you need the functionality of a POS system without any clunky hardware, a countertop terminal is the perfect solution. As their name suggests, countertop terminals rest on countertops, making it simple for customers to tap, insert, or swipe credit cards. Many countertop terminals also have interactive screens, allowing customers to sign, enter PINs, request receipts, and more.
Mobile card readers revolutionized the way many businesses accept payments. With a mobile card reader, merchants connect a card reader to a mobile device via Bluetooth or traditional cable. Merchants download a POS app, which allows them to control the card reader. This technology fosters flexibility, allowing transactions to occur anywhere and boosting sales on the go. The device's portability facilitates transactions without the constraints of a fixed location.
Payment gateways and virtual terminals empower your business to accept card-not-present transactions. To offer your customers ultimate payment convenience, offering more than in-person payments is critical. Payment gateways are online portals, usually integrated into eCommerce stores, allowing customers to input their credit card details to process transactions. Many payment gateways offer extra features to provide added convenience for customers, such as saving credit card details for future use.
On the other hand, virtual terminals allow staff members to input customer credit card details to process payments. This payment tool is designed for accepting payments over the phone or via email when a customer can't visit a physical retail store.
Credit card processing fees are among the first factors to consider when choosing a new payment processor. However, there are various fees and pricing models to consider when comparing processing rates. Payment processing fees are projected to rise in 2024, and without understanding these fees and pricing models, you may overpay for credit card processing and damage your margins. First, let's look at the most common fees levied by credit card processors:
Now that you understand the various fees processors charge merchants, it's time to look at payment processing fee pricing models. There are three major pricing models:
When selecting a payment processor, merchants must prioritize Payment Card Industry Data Security Standard (PCI DSS) compliance. PCI DSS ensures secure handling of credit card information to prevent data breaches. Merchants should choose processors compliant with PCI DSS standards, reducing liability and enhancing customer trust. Verify the processor's compliance status, ensuring they adhere to the latest requirements.
While changing payment processors in the future is possible, choosing the best merchant service provider from the outset will save your business time and money. Understanding a few critical factors will help your business choose the best partner for credit card payments:
A merchant account is preferable to a payment aggregator due to greater control and customization. Merchants with their accounts have more flexibility in managing transactions, personalizing branding, and negotiating fees. It reduces the risk of sudden account holds or terminations. Additionally, a dedicated merchant account offers a direct relationship with acquiring banks, potentially resulting in better support and tailored solutions, making it a more reliable and scalable choice for businesses with substantial transaction volumes. Payment aggregators offer quicker access to payment processing services, but many merchants using payment aggregation face unexpected account closures, slow funding timeframes, excessive fees, and other issues.
It's essential to choose a payment processor with third-party software platforms, such as accounting software, customer relationship management (CRM) software, and more. It facilitates seamless data synchronization, allowing merchants to access comprehensive insights and analytics. Ultimately, this synergy between payment processing and third-party software optimizes business processes, making operations more efficient and adaptable to evolving market demands.
Choosing a payment processor with robust security and fraud prevention measures is critical to safeguarding sensitive financial information and maintaining customer trust. Effective security protocols protect against data breaches, identity theft, and unauthorized transactions, preventing potential financial losses and reputational damage. A reputable payment processor employs encryption, tokenization, and advanced fraud detection tools to create a secure transaction environment.
A merchant must prioritize assessing a payment processor's customer support because seamless and responsive assistance is crucial in resolving payment issues promptly. Timely support ensures uninterrupted transactions, minimizes potential revenue loss, and enhances customer satisfaction. In the dynamic realm of commerce, unforeseen challenges like transaction disputes or technical glitches demand swift access to support.
Credit cards and other digital payments continue to play an increasing role in the world's payment landscape, with cash payments now representing less than 20% of payments in the United States. Regardless of your business's industry, accessing affordable payment processing helps reduce overhead and improve cash flow. Likewise, a reliable payment processor makes it easier to avoid payment outages, fund freezes, and other transaction pitfalls.
While there's no shortage of payment processors available to modern merchants, many offer payment aggregation services, which provide reduced control over your business's payment infrastructure. The most reliable way to access affordable and dependable payment services is through a merchant service provider (MSP). MSPs provide access to dedicated merchant accounts and offer dedicated support, affordable processing fees, custom features, and third-party software integration!