During the course of my work, we use an integrated credit card solution.  Integrated from the view-point, that there are no separate machines that handle credit card processing.  One of the first things that is needed is an understanding of the process.  I thought I’d take the opportunity to explain the mystery behind credit card processing.

The first thing that is needed to process credit cards is  a merchant account number.  For a better term, this is an account with the credit card company to handle cards.  If you want to process American Express and/or Discover, you have to set up merchant accounts with each.  (Some banks also setup Discover as a part of your first merchant setup.  American Express is a separate setup).

As a part of your merchant account setup, information is collected about what type of business you are running.  Is this a retail store, and/or a mail order / telephone order (MO/TO) business.    Once you have your merchant account, the next thing is to get a credit card processor.  At this point, I am not talking about equipment, but, an organization to actually handle getting approvals and your money deposited to the bank.  Most organizations that setup merchant accounts also setup  the merchant up with a credit card processor.  All credit card processors are not created equal.  Some credit card processors cannot take PIN debit transactions.  Some are unable to accept MO/TO transactions.  Know what type of business and the types of transactions will help decide the platform that you will be assigned to.

Once this is set up, now is the time to purchase equipment.  Your merchant services provider will be able to assist you in this purchase.  If you are going to take debit cards, a “key” needs to be electronically inserted into your device.  The act of inserting this “key” into your equipment is called an “injection”.   Now that we have all the pieces in place, lets look at a transaction.

We will start with a non-integrated true credit card transaction (Visa).  Once the total of the order has been determined, the customer hands the credit card to the merchant.  They swipe the card into their credit card processing terminal, enter the amount, and requests an authorization.  The credit card machine then sends that data to the credit card processor.  The credit card processor reads the customer’s Primary Account Number (PAN), and transmits this information to Visa.  At this time, there is a “fingerprint” that is added to the transaction.  It’s more like a transaction number, but, it is a unique identifier matching the merchant, the credit card number, and the transaction amount together.  Once Visa receives this information, it is passed to the bank that issued the card.  A credit card number has a Bank Identification Number (BIN), that is a part of the credit card.  The issuing bank, determines if the card should be approved.  If the answer is yes, an authorization code is sent back to Visa, which is then sent back to the credit card processing company and back to the merchant.  While there is little data being sent, it has to go through several different “hands” and make the trip back.  This typically takes less than 10 seconds to process.  There is a company that acts as a data acquirer (another link in the chain that happens before the credit card processor) that has an average of 3-4 seconds to process a transaction.  It amazes me every time that I use a credit card to see how quickly this “transaction” actually takes place.

Now that we have an approved charge, we continue the day racking up more and more charges.  At the end of the night, we “settle” our “batch”.  The process of settling is to re-submit the information to the credit card processor, and have them deposit the funds into our account.  There are two ways that we can have funds deposited.  One method is the “net” charge method.  This is the amount of your charges, less your service fees for taking the credit card.  The other method is a “gross” charge method.  The total amount of your credit card batch is deposited, then the service fees are taken out.  The “net” method is typically what banks and merchant account providers start an account with.  It should be noted that the accounting types prefer the “gross” charge method.  They can see that what was charged during the course of the day, actually made it to the bank.  This makes the process of reconciling statements (bank and credit card statements) easier to manage.

As you can see there is a “fee” for taking credit card payments.  There are several factors that can cause this rate to change.  First, there is the Visa interchange rate.  This is the rate that Visa charges to handle the credit card payment.  Visa sets their rates in April and October of each year.  Then there is a rate for which the credit card processing company or the merchant account supplier attaches to the interchange rate.  I believe the current fully qualified interchange rate is 1.65%.  Your credit card processor can add “basis points” to that amount.  (A “basis point” is 1/100 of 1%.  30 basis points is 0.30%. ).  Let’s say that your credit card processor is adding 30 “basis points” to handle your processing.  Your effective rate on a fully qualified transaction is 1.95%.  There may be a transaction fee associated with the transaction.  This is typically $0.05 per transaction.  Some people would say that’s a great deal to be charge 1.95% +$0.05 per transaction.  This is true, but, that is for a fully qualified transaction.

A fully qualified transaction means that the credit card was swiped.  This is a big deal.  If you manually enter a credit card number into the machine, it doesn’t get the fully qualified rate, it get’s downgraded.  A downgrade can be 20 to 30 basis points for the downgrade.  If the credit cards is a “rewards” card, the percentage that the bank needs to collect to give the rewards is also added to the merchant’s rate.  If we were talking about a “rewards” card that had 3% for gas purchases, and you were a service station, your 1.95% could very easily to to 4.95% of the retail price.  Processing a credit card transaction for a MO/TO transaction typically carries it’s own downgrade.  If you run a shop, and don’t send, at least, the zip code to process a credit card, count on a downgrade charge of 25 to 30 basis points.

Downgrades can also be not settling a batch in a timely manner.  Timeliness for settling a batch is typically 24 hours.  Downgrades can start after that time has expired.

The rates that you can get from your merchant account provider consists of many variables.  Some of those variables is the credit worthiness of the organization.  Just like getting a credit card, less credit worthy people typically pay a higher interest rate, so do merchants.  The volume of transactions (number of transactions, and average dollar amount of transaction) also has a factor in the credit card acceptance percentage rate.  If you start with a merchant services company, and after a couple of years, your volume of transactions and dollar amount of transaction increase; talk with your merchant services company.  There might need to be a review of your rates to lower them.  It typically doesn’t cost anything to get a review, but, it could save you money.

This is the first of many posts that I’ll do about credit cards.  Later, we will discuss PCI-DSS (Payment Card Industry-Data Security Standards) and what that means to a retailer, and how to become PCI compliant.

/jed