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Credit Card Processing Explained


If you’re running a business, you could be leaving a lot of money on the table by not accepting credit card payments. According to Intuit, not accepting credit cards can cost the typical business $7,000 in annual sales.

That said, a lot goes into setting your business up for credit card processing. Between numerous middlemen and different rate plans, there’s a lot to consider. Before diving into that, let’s discuss what exactly occurs when you accept a credit card payment from a customer.

Credit Card Processing Ins and Outs

Let’s start off with a scenario that we’re all familiar with. A customer visits a business to make a purchase. When rung up, she opts to pay with her credit card. Four parties are initially involved with the transaction:

The customer

The business

The issuing bank (the bank that issued the credit card)

The acquiring bank (the Merchant Account Provider’s bank)

Most businesses turn to a Merchant Account Provider or bank with a merchant services division for their credit card processing needs. That’s because accepting a credit card transaction isn’t as simple as a cash deposit. There is more risk involved.

The issuing bank charges the Merchant Account Provider an Interchange fee for the transaction. This fee varies greatly due to factors like credit card type and risk. This Interchange fee is passed onto the business while the Merchant Account Provider simultaneously charges the business a markup to process the transaction.

Why All the Fees?

The acquiring and issuing banks are both taking a risk on the transaction. From the perspective of the issuing bank, the customer could fail to pay his credit card bill. From the perspective of the acquiring bank, the customer could file a chargeback if the product is deemed insufficient, doesn’t arrive or is the result of a stolen or fraudulent credit card.

Credit Card Processing Middlemen

I expound on this further in this article, but there are more behind-the-scenes players powering credit card transactions. In brief, they include:

Card Associations: They set the rules and manage Interchange for the credit card brands (Visa, MasterCard, Discover and Amex)

Payment Processors: They maintain the computer network that supports communication between the Merchant Account Provider and banks

Payment Gateways: They facilitate the transfer of information between the credit card terminal and Payment Processor.

Some of this complexity can be bypassed by working with a Payment Facilitator like Square or PayPal. These companies are ideal for small-scale merchants due to their quick setup. That said, they can also hold funds from your bank account since they don’t underwrite their customers. The funds are held in the event of a chargeback.

If your credit card terminal is managed by a different company, then there’s a whole different support staff to deal with.

I know, there are many parties involved. That’s what I meant when I said accepting credit card payment is more complicated than depositing cash in your bank account. Unfortunately, not accepting credit cards can be dire for a business especially since credit cards are the preferred payment method for larger purchases, according to CreditCards.com.

Luckily, you can work with a Merchant Account Provider that provides all these services in one. This will reduce the number of middlemen you have to deal with and simplify your credit card processing. The more streamlined your services, the easier it is to focus on other important aspects of your business.