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What is Credit Card Processing/Merchant Services?

Simply put, credit card processing is a service that will securely and remotely process a credit card transaction. This is important for all types of merchants, including online, phone, and even in-person businesses, because it allows businesses the ability to accept credit card payments for their goods and services.

Here's a basic rundown of how credit card processing works:

  • You collect the customer’s credit card information. Remember, this can be over the phone, via an online form, or by swiping the card itself in person.

  • The credit card processor (aka payment processor) takes that information and encrypts it. This is an important security measure responsible for ensuring that your customer's payment information can't be seen by anyone eavesdropping on the transaction.

  • Once the information is encrypted, the credit card processor sends it over to the authorization network, which, in turn, asks the card-issuing bank for permission to continue the transaction.

  • Assuming your customer has the necessary credit limit or funds, and no red flags are raised, the bank will approve the transaction, sending a confirmation to the credit card processor. The CCP, in turn, sends a confirmation to you, and you can complete the transaction.

  • The total amount of the transaction is then transferred from the issuing bank to the merchant’s bank account.

While this sounds like it should take a long time, in reality, the whole process is completed in a matter of seconds. Typically, businesses are required to have a business account with a merchant services provider in order to get the money transferred to their accounts.

Merchant services providers will frequently bundle various important business services into a single plan to make it easier and more affordable for business owners to manage. This includes credit card processing, handling PCI compliance, payment tracking, invoice collections, customer management, and inventory management systems.

More good news, merchant services usually integrate seamlessly with a lot of the business management tools you already have on your "payroll," including QuickBooks or your POS (more on that in a minute). You can get hardware such as virtual terminals and mobile swipers.

How Does CCP Integrate with My POS System?

If you have a POS (point of sale) system in place, then your CCP will be able to automatically integrate with the software and hardware so that you can accept payments and manage other business aspects (reporting, inventory, invoices, etc.). So, when you swipe a credit card with your POS, the CCP will take the information and complete the transaction as described above.

How Much Does Credit Card Processing Cost?

Credit card processing costs vary from one provider to the next, but there are a few fees that are pretty standard across the market, including:

  • Interchange fee

This is a 2-tiered fee that nearly all CCP services charge (there are a few that don't, but make sure you look at the rest of the pricing structure to see if the savings are paid for in another way): the flat charge per transaction (for example $.20) and a percentage of the transaction total (1%, 2%, 3%, etc.). This may also be called a wholesale or merchant discount rate. This can become a hefty fee to pay, but in essence, the interchange fee is the price you are paying for being able to accept credit card payments. Most businesses find it worthwhile to pay the charges.

  • Assessment fee

This fee can be charged by the credit card associations, not by the actual credit card processor (American Express, Visa, MasterCard). It’s sort of a rental fee for being allowed to use their network. The assessment fee can range from 0.13$ to 0.15% usually.

  • Hardware costs

Some credit card processors come with rental or for-pay hardware. These prices will vary considerably; some services give you the hardware for free (on a loan basis), while others will require you to pay for the hardware upfront.

Other costs may include a chargeback fee for disputes about chargebacks, and markup fees, the bottom line profit that the CCP service is making for its services.