What You Should Know About Credit Card Processing

What You Should Know About Credit Card Processing

by Jennifer Loganathan

No business in today's marketplace can survive without the ability to accept credit cards for payment for their products and services. More so, with the ever increasing popularity of online shopping and e-commerce, credit card acceptance has become a necessity and credit card processing is the key to accepting payments electronically. As most people in the United States prefer to not carry cash around, both due to the security issue (cash if stolen, cannot be replaced) as well as convenience (why carry bundles or cash when you can simply carry a plastic proxy with no technical spending limit?).

Even as debit cards, electronic checks and internet checks gain acceptance, credit cards are relatively the most popular form of online payments. How the whole process of payment through a credit card takes place warrants some understanding and technical clarification. First, credit card information has to be accepted, via a secure online form in case of internet shopping, or through a swipe terminal that transmits information to the processing backend. This backend acts as the processing unit which validates the credit card information supplied and provides an authorization to the acquirer or clearing house to exchange funds between the buyer and the seller. The acquirer then will deduct the credit limit from the buyer's credit card account and deposit funds into the merchant or seller's merchant account, or bank account (in case a third party credit card processor is used). The net amount deposited into the merchant's account will be the total sale or purchase amount, less the transaction fee as well as other variable fees such as AVS (address verification service) and CVV/CVC (card verification value or code).

The credit card processor acts as the intermediary or interface between the card reader or payment gateway (in case of e-commerce) and the credit card companies or issuing banks. In order to process each transaction, the credit card processor will charge a commission as well as some other fees, from the merchant selling the goods. For a buyer, there is no real direct charge for conducting a transaction, apart from any annual fees that may be charged by the issuing bank or any currency conversion charges in case of an international transaction.

Although typically credit card processing requires either physical equipment or a swipe card terminal, credit card transactions can be done remotely via the telephone or wirelessly through a wireless terminal as well. Such means are ideal for merchant situations where there are no telephone lines nearby, or worse, no electrical output to which the terminal can be connected. For instance, in a flea market or open air exhibit, a merchant can simply dial in a provided phone number, and provide the credit card information. All processing will be done remotely and an authorization can be obtained via the telephone itself. Wireless terminals are more effective in case the merchant has to make on-site presentations. For instance, a vacuum cleaner salesman could make a home demonstration and accept payment for the sale immediately, without having to even telephone anyone or go back to his office. The wireless terminal uses the GSM or CDMA technology, similar to that in cell phones. The basic difference between a regular terminal and a wireless terminal is that while the former uses a telephone line to connect to the processor, the wireless terminal connects wirelessly for credit card processing.

There are plenty of options to choose from, when it comes to credit card processing. Obtaining a merchant account through a specialist merchant account provider and a third party credit card processor are common. With intense competition in the market, there are many offers available to choose from. Some of the key considerations in selecting a partner for credit card processing are per transaction fees, set up and maintenance costs and account management facilities offered by the credit card processor or merchant account provider. In addition to these typical considerations, it is important to evaluate the seller protection policy, especially if you're a high risk merchant and are likely to receive a lot of chargebacks. Finally, technical support (such as 24X7 customer support, which is often available through offshore merchant accounts), the frequency of funds transfer (for instance, some vendors may transmit the funds only once every month) and fraud scrubbing are of critical importance.