It’s almost impossible to do business in the modern economy without interacting with credit cards. Credit cards are great for consumers. They provide bonuses and discounts, allow them to expand their purchasing power, and offer financial flexibility for emergencies.

However, credit cards can be something of a nightmare for merchants. They add another layer of complications to the already challenging task of operating your business. That’s why finding the right credit card processing service is an essential part of running a successful business today.

This article covers the basics about credit card processing. It explains how credit card processing works. It’ll also go over the things you should consider when looking for the best credit card processing service. Use this information to fuel your business and ensure that it grows at the rate that it should.

What is Credit Card Processing?

Credit card processing refers to the payment process that merchant services use to get you the funds from transactions made with credit cards. It’s possible to set these connections up directly with credit card payment brands. However, that can be complicated and expensive.

Credit card processing services take care of the difficult and complex job of negotiating with payment brands. They also design and implement specialized and complicated software to conduct financial transactions. They help verify that your customer has the funds to pay for their service. Finally, they help get money from the credit card company into your account.

As you can see, those are all vital steps to selling any good or service. This is especially true with the rise of online shopping and buying. After all, it’s hard or impossible to use cash to buy things online. That means if you want to compete with the world’s biggest stores and the other merchants in your home town, you’ll need a credit card processing service.

How Does Credit Card Processing Work?

Credit card processing services work by handling the series of complex steps that are needed to make a card-based transaction. They execute these steps in seconds. As a result, your customers get fast, reliable service, and you get more sales and profits. In order to appreciate the services that you get from credit card processing, it’s necessary to understand how a card-based transaction works.

Card Transaction Process

When a customer swipes or inserts their card at your location, or enters their card information to your site, a series of steps beings to start a financial transaction.

First, your credit card processing service takes the information from the card reader or online payment gateway. Next, it sends the information about the transaction to the card’s payment brand, such as Visa or Discover. The payment brand forwards that information to the issuing bank. After that, the issuing bank lets the payment brand know whether or not you have the funds or credit to make the transaction. This is called giving authorization or approval.

Once the payment brand receives an answer from the issuing bank, it tells your credit card processing service the answer. Your processing service then forwards that information to your point of sale or payment gateway. This allows you to proceed with the transaction if it’s approved. If the transaction is denied you can deny the sale or ask for another form of payment.

It’s easy to see how this process can be complex. It relies on multiple independent financial networks talking to each other at near instant speeds to make and transmit decisions about transactions. Credit card processing companies do this for you. They also deposit funds from the credit card transaction into your account.

How do I Find the Best Credit Card Processor?

Like other merchant and business services, credit card processors are tricky to compare. There are several reasons this is true. First, each company has their own pricing and fee structures. Most companies charge fees based on the volume of transactions you do each month. Companies with more transactions pay a lower fee per transaction. Companies with fewer transactions pay a higher fee per transaction.

Also, credit card processing services usually offer other merchant services as well. That means the cheapest credit card processor might not the be most cost-effective choice for your business. These services include things like POS hardware and software, merchant accounts, and payment gateways.

Moreover, credit card processors can charge different fees for interacting with different payment brands. One of the reasons why some stores don’t accept certain cards is that the monthly and/or transaction fees they’d have to pay to accept those cards isn’t worth it to them. If your business does a lot of transactions over a wide range of payment brands, then you’ll want to check and ensure that the overall cost of the service you’re considering is the best value for your business.

One of the best ways to create a comparison between the cost of two different credit card processing services is to calculate what total percentage of your transactions will go toward paying your processing fees. This will enable an apples-to-apples comparison across the different service options. That will help you pick out the best value.

Transaction Fees

One of the first things you should look for when you’re deciding on a credit card processing service is the credit processing fees they charge. Nearly every company charges a fee per transaction. For example, one company charges 2.9% + $0.30. That means for a $10 transaction, you’ll pay $0.59.

That model is also an example of interchange plus pricing. This is the best pricing model for the merchant. Interchange plus pricing means that you pay the cost of executing the transaction plus a fixed surcharge. That lets you know exactly how much money the credit processing company is making off of you. It also means you can predict how much your processing fees will be.

Other companies use a tiered pricing model. This model is less transparent because there’s no way to know what your fee per transaction will be until you know the total number of transactions you have at the end of the month.

Other Fees

You also need to compare other fees for your processing service. This will let you understand the actual total cost of the service. For example, one company might have lower transaction rates. However, it might also charge more fixe fees every month, making the total cost higher. Many of these fees are junk fees that are used to pad the profits of the credit processing company and disguise the true cost of their service.

For example, some companies charge a start-up fee. Others charge monthly fees like a PCI compliance fee, a maintenance fee, network access fees, and more. You might get charged a few if you want to accept certain payment brands. This fee can be in addition to a higher per-transaction rate for those payment brands.

Many credit card processing contracts are month-to-month. However, it’s increasingly common to get your credit card processing services as part of a package of merchant services. If that’s the case, you’ll want to see if there are any early termination fees. You’ll also want to see what kind of charges are attached to the other merchant services you’re getting.

One example of this situation is with point of sale systems. Credit card processing companies might offer point of sale systems with their service. However, you might not realize that you’re actually leasing these systems from the company. Moreover, there can be an early termination fee for this lease, even if there isn’t one for the card processing service itself.

This shows why it’s extremely important to read the fine print for any contract you sign for merchant services. It’s also essential to get a full breakdown of the costs and fees associated with a service. Sometimes companies don’t advertise those fees on their site. That means you’ll have to call or email customer service or the sales department to get a full breakdown.

Other Benefits

You’ll also want to look into what other benefits the credit card processing company provides. As was mentioned earlier, it’s increasingly common to get credit card processing as part of a package of merchant services. If the package of merchant services provides value for your business, then it might be more cost effective to get a credit card processor with a higher cost.

For example, if you buy or lease software or services to manage your payroll, that’s an extra expense. If the credit card processing service offers a point of sale system that comes with payroll and scheduling software, then that might replace your need for your current system. That means that even if the credit card processing fees are higher with a certain company, you’ll still save more money using them.

Specialized Credit Card Processing

In addition to standard credit card processing services, there are some specialized services as well. These include merchant account processing and high-risk credit card processing services. Many businesses will be interested in merchant account processing. Fewer businesses will need to look into high-risk credit card processing.

Merchant Account Processing

Merchant account processing works just like normal credit card processing. The difference is that the processing service provides you with a merchant account. This account acts like a special line of credit. The processing company provides the funds from your card transactions immediately. It then gets repaid by your customer’s card issuer and bank.

This setup has the advantage of providing funds from your transactions very quickly. This can be essential for certain business models. It also helps you conduct your business more smoothly. You can ensure that you’ve always got payroll covered. You can also place new inventory orders when you need them, not when your money comes in.

Some credit card processors provide you with a merchant account as part of their services. You should carefully evaluate any fees associated with these accounts. Remember, when you’re talking to the company you need to get a bottom line figure for what the services will cost. Don’t let salespersons confuse you by breaking down every single transaction price and fee. 

High Risk Credit Card Processing

Some businesses get classified as high-risk. Each credit card processing company has its own method of determining whether or not a business is high-risk. Some of them are very strict, while others are more relaxed. That means it’s worth your while to find out if a merchant services provider considers your business to be high risk before you go through the effort of trying to start services with them.

High-risk merchants get different treatments from different merchant services companies. Some won’t do business with high-risk merchants at all. Others will charge much higher rates and fees because they deem your business to be high risk. If there’s a chance your business is considered high-risk, you’ll want to take these higher fees into account. Some of the factors merchant services companies use to determine if you’re high-risk or not include:

  • Business location – businesses headquartered overseas that operate in the US are more likely to be flagged as high-risk because of the potential for fraud.
  • Industry – If the industry you’re in has lots of fraud or a high rate of chargebacks then you might be high risk.
  • Sales and marketing practices – this is related to the industry you’re in, but if your business is thought of as a type of scam, then you’ll be considered high risk. Examples might include some debt services, psychics, and product-resale businesses.

As you can see, there’s a lot to consider when you’re thinking about credit card processing. Make sure you carefully weigh all of the variables when you’re shopping for merchant services. The lowest sticker price might not be the most cost-effective option. Remember that your business relies on credit card sales, so be sure to take factors like network reliability into account. Your business also relies on getting funds from transactions, so ask about disbursement and funding timeframes. With careful planning and solid research, you can find the best credit card processor for your business.