But what exactly is involved in Credit Card Processing?
1. Your Merchant Account:
Any service you ultimately select will require that you have a merchant account.
Merchant accounts are accounts established specifically to accept credit card sales proceeds (which are debited to the cardholder's credit card account). From there, after deduction of the fees associated with providing you with your credit card processing service, the funds are transferred to your business' checking account.
Merchant accounts are available through banks and also through what are known as independent service organizations, or ISOs.
If you have a good history with your bank, it is worth your time to speak with the bank about setting up your business with a merchant account. If it views your business favorably, you may pay lower transaction fees and be charged a lower discount rate (we'll discuss these costs a little later).
While obtaining a merchant account through your own bank may provide you with more security, banks tend to be very selective when analyzing the risks involved in providing you with a merchant account.
The chief risk involved in accepting credit cards as regards an Internet business (or for mail order or telephone sales businesses) is, of course, that you don't physically have the customer's credit card in front of you to swipe through a terminal. This then opens the door to much greater incidences of fraud - and, as we shall see, this increased risk manifests itself in higher fees being charged to merchants who accept credit cards without having the actual customer - and his or her card - in front of them.
Because of these risks and the conservative nature of banks, when seeking a merchant account to complement their credit card processing service, the majority of businesses must engage the services of an ISO. As they are not as highly regulated as banks, ISO's are much more amenable to accepting higher-risk businesses than are banks. In addition, many also offer a number of associated services, especially to online businesses, such as shopping cart capabilities and website design. You can review a number of companies offering these associated services in the Other Online Payment Services section of The Merchant Account Advisor.
And, a little further along in The Nine-Minute Tutorial, we will explain what is involved in applying for your merchant account - and the questions you need to ask.
Now, besides your merchant account, your business will also need to be set up with a credit card processing service. Fortunately, most reputable providers of merchant accounts, whether banks or ISOs, will also offer or direct you to the actual processing service required to accept credit cards.
2. How Your Credit Card Processing Service Processes
The credit card processing service is the entity that actually receives the credit card data from your transaction with your client, and then processes that information so that the customer's credit card is debited - and you ultimately receive the proceeds of the sale.
This process generally involves four stages:
Your business makes the sale and passes along the sale and credit card information to the merchant account provider (the bank or ISO).
The merchant account provider sends an authorization request to the credit card processing service, which verifies the credit card information - checks the credit limit and seeks to ensure the card has not expired and is not stolen, etc. Typically, at this point, you would receive an authorization number.
The information is then transmitted by the credit card processing service to your customer's bank, which debits your customer's credit card for the sale. The funds are then deposited to your merchant account.
Finally, the monies, less the merchant account provider's fees, etc., are transferred to your business checking account.
Generally the whole process takes 2 to 3 days, but it can take longer depending upon the risk associated with your type of business' products or services, which credit card your customer uses, which merchant account provider you select, etc.
Each month you will receive a monthly statement from your merchant account provider, summarizing the month's transactions, fees, etc.
3. The Three Methods of Accepting Credit Cards
There are three options available to merchants wishing to accept credit cards.
First, if your business involves face-to-face transactions with your customers, you can purchase or lease the appropriate terminal hardware to handle the credit card transactions. This is the typical "swipe machine" seen in retail stores.
Second, if your business centers on taking credit card orders by mail or telephone order, you can purchase or lease software to be installed in your computer. You then manually enter the credit card information and transmit it over the Internet to your credit card processing service or merchant account provider.
Third, if you are or will be using a credit card processing service via your website, you will need a real-time credit card processing service, again, over the Internet. This method will allow you to take mail and telephone orders manually as well.
NEXT: Let's now go into a little more detail about what is involved with these credit card processing methods.