Comprehensive Guide to Credit Card Processing

Whether you are an offline or online merchant, it is most likely that you deal with credit card processing on a daily basis. While many sellers disregard the complex algorithm that launches after the client clicks the “Pay” button, it is best to know how it works.

Card Payment Processing: How It Works

These days, the vast majority of trade activities are conducted with credit card purchases at land-based and online stores. But how do credit card transactions work? To understand what exactly the process entails, it is vital to know which entities participate in it.

Payment Processing: What Is the Meaning Behind This Term?

Payment processing is a series of operations required for a credit card transaction initiated online, in-person, over the phone, or via mail to be completed. This process occurs behind the scenes every time a consumer attempts a purchase and is facilitated by multiple entities.

Parties Involved in Credit Card Processing

Behind a seemingly simple purchasing process, there is a complex system of cooperating parties, such as:

• The cardholder - the consumer making the purchase.
• The issuing bank - the cardholder’s bank.
• The merchant - the seller providing the product or service.
• The acquiring bank - the merchant’s bank.
• The payment gateway - the intermediary technology between the merchant and the payment processor that collects essential data and returns the transaction’s approval or rejection.
• The payment processor - the company that processes credit and debit card transactions for the merchant. Payment processors connect the issuing bank, the seller, and the card network.

The card network mentioned above is the last puzzle piece that makes the credit card processing algorithm complete. It acts as the transactions’ facilitator by creating virtual payment infrastructures.

The major globally renowned credit card networks are:

• Visa
• Mastercard
• American Express
• Discover
• JCB
• China UnionPay

Apart from aiding the transaction flow, a credit card network regulates which cards a certain merchant deals with. However, the acceptance rates of the major card networks are fairly similar, exceeding 10 million locations.

Now that you are familiar with the main elements of this system let’s move on to find out the key stages of how credit card processing works.

Main Steps of Credit Card Processing

So what is a credit card processing system, and what steps does it consist of? Here is what happens during card processing:

1. The consumer initiates an order and enters card data on the merchant’s website.
2. The merchant collects the information about the order and sends it to the card processor.
3. The card processor forwards the transaction information to the credit card network, which passes it to the cardholder’s bank.
4. The issuing bank checks the information for accuracy and the availability of funds in the account and forwards the verification results back to the credit card processor.
5. If permission to write off funds is given, the specified amount is transferred to the seller's account.
6. The consumer receives the transaction report with the information on the completed payment or on the refusal to accept funds.

Depending on the seller's bank, the type of credit card, and the payment system used, a commission may be charged during the transaction.

Costs Involved in Credit Card Processing

There are different types of fees associated with every credit card transaction’s processing, namely:

• Interchange fee - These fees have to be paid by the acquirer to the card issuer for every card transaction. They vary depending on the type of bank card used for the purchase, the payment sum, and the industry the company belongs to. Higher interchange fees usually apply to online purchases due to increased fraud risks.
• Payment processor fee - Payment processors also often charge fees for processing the transactions. These can come in the form of monthly charges, fees per transaction, equipment lease fares, and so on.
• Assessment fee - Merchants have to pay this charge directly to the credit card network, with its sum depending on the monthly transaction volume. The assessment and interchange fees, when combined, are often referred to as a “swipe fee”.

When picking a card payment processor, you should ensure that you are aware of all the fees that you are expected to cover.

Common Payment Processor Pricing Models

Another important factor to consider when it comes to accepting card payments is the processor’s pricing model. Some of the most common tariff types are:

• Flat rate - If you agree to this pricing model, the processor will charge a fixed fee for all card transactions regardless of the card type used during the purchase. Keep in mind that card-present transactions usually have a lower flat rate than the card-not-present ones due to having fewer associated fraud risks.
• Tiered - In the case of this rate, the payment processor will determine the fee based on factors such as the type of the card used, the transaction’s risk level, and your business’s overall transaction volume.
• Interchange Plus - This pricing model is often considered to be the most transparent and beneficial one for businesses since the costs are separated into two clear categories: interchange fees and processor markup.
• Subscription - In this case, the merchant pays the processor a flat monthly service rate, together with a small per-transaction fee.

How Long Does It Take a Processing Payment to Go Through?

As a rule of thumb, credit card payments can take anywhere between 24 to 72 hours to be processed, with the majority of transactions being finalized within the first two business days.

However, merchants that work with payment processors can expect additional waiting time before receiving the funds, as these service providers separate transactions in batches and send payouts on a fixed schedule, typically once a week.

Depending on the contract, it may also be possible that your payment processor makes payouts only when a certain threshold has been reached. While the processing time can be longer in this case, it is a cost-effective option that can save you a pretty penny in the long run, as it helps you avoid covering extra charges that can occur depending on the payment delivery method.

Besides, not all payments are processed at the same speed. The speed with which the funds reach the merchant depends on a variety of factors, including:

• The time when the transaction was initiated
• The method used to make the credit card purchase
• The credit card issuer

Online and phone payments are usually the fastest to be processed, taking approximately 1 to 3 business days. Mailed credit card payments, on the other hand, are the longest to deliver and are vulnerable to delays caused by such factors as mail volumes and postal holidays.

In the event that the funds haven’t reached the merchant account within the estimated period, it often proves to be useful to check the transaction status with the payment processor. This can be done by calling or submitting a support ticket and requesting a transaction report.

In-Store Credit Card Processing

When you present a bank card to a cashier in an offline store to pay for goods, the POS terminal reads the card data and payment information and sends it to the acquiring bank where the merchant has an account. The merchant's bank then contacts the cardholder’s bank. If the transaction is approved by the issuing bank, then the specified order amount is transferred to the seller's account.

How to Optimize the Process?

It is only natural for a merchant to wish to create the smoothest purchasing process for the customer. Luckily, land-based businesses have the opportunity to do so by optimizing credit card processing, some of the best solutions being:

• Enabling contactless payments via kiosks
• Facilitating the use of e-wallets
• Setting up mobile points of sale (mPOS)

It is also worth for merchants to look into obtaining an all-in-one solution, such as a smart POS terminal, which typically:

• Is integrated with the popular acquirer banks
• Offers multi-card support
• Features a user-friendly SDK
• Comes along with a convenient management system

Besides, the smart POS providers often cater to the clients’ need for technical support and consultations.

Credit Card Processing in E-Commerce

In e-commerce, credit card processing follows the same algorithm as in offline stores, with one exception: the POS terminal is replaced by a payment gateway. While a simple software solution may be sufficient for a small business, larger companies must think of card processing optimization.

How to Improve Card Processing in E-Commerce?

So how does merchant processing work for companies that deal with online trade? As the popularity of online stores grows alongside the trading volumes, the need for smart solutions arises. Therefore, an E-commerce gateway is worth implementing. Such a payment gateway features the following:

• Multi-acquirer approach. This means creating a unified network of acquirers that offer payment processing coverage worldwide using Intelligent Transaction Routing (ITR). A multi-acquirer approach will provide additional autonomy, control over the processes, and an increase in the conversion rate.
• Machine learning balancing system. Using a smart traffic balancing system is a game-changer if your project is dealing with multiple acquiring banks. It will collect the information and analyze the processing success to route transactions to the processor with the highest efficiency.
• Reliable anti-fraud system. Introducing a multi-stage anti-fraud system is of utmost importance for risk management and consumer safety, as it will block fraudulent transactions based on customizable criteria.

How Can Payneteasy Help?

At Payneteasy, we strive to provide users with intelligent custom solutions. As a business owner, you are sure to appreciate the benefits we offer, such as:

• Fast and easy integration
• Full technical support
• Flexible software to match any payment interaction
• Solutions tailored to your specific needs
• Extra-strong fraud prevention systems
• User-friendly back office
• Branded checkout page
• Efficient traffic routing system

Throughout the years, our company has been demonstrating an unparalleled level of service and a high customer satisfaction rate. Our white label payment gateway solution is exactly what your business needs to level up credit card processing. Tell us about your project, and we will get back to you with a personalized offer within a day!