Credit card processing is more complicated than it may seem. There are many different parties involved, which all work together to process one transaction. If you aren’t aware of the process and everything involved, you will be more likely to overpay for the credit card processing at your business. Just becoming aware and learning the basics of how credit card processing works, you can be sure that you’re getting the best deal.
The four parties involved in a credit card transaction are the customer, the bank that issued the customer’s credit card, the merchant, and the bank that is providing the credit card processing for the merchant, also known as the acquiring bank. Just as customers are “borrowing” money from the issuing bank when they make a purchase with their credit card, a merchant is also “borrowing” money from the acquiring bank, so both the issuing bank and the acquiring bank charge a fee, leaving the merchant with a total profit of less than the amount that the customer spent.
The fee the merchant is charged by the acquiring bank is called the discount rate, and the issuing bank’s fee is called the interchange rate, and both of these rates are basically just percentages of each transaction. The interchange rate is charged to both the acquiring bank and the merchant, and the level of the rate depends on different factors associated with different banks and different types of credit cards.
It also depends on what type of business the merchant has. This is because some types of businesses are more at risk for chargebacks than others, and issuing banks want to make sure they will be covered if chargebacks do occur. Chargebacks occur when a customer disputes a charge on their credit card bill, for any of a number of reasons. When this happens, merchants lose the amount of the charge plus associated fees.
Dealing with the acquiring bank can be one of the most confusing parts about accepting credit cards. There are usually two different entities that make up the acquiring bank, and they use underwriters to determine the risk that your business is giving the bank, since they put the money from transactions into your account before the payment process is actually complete. Therefore, they usually require you to put up collateral, which could include your house or savings.
But fortunately some payment processing companies take the complication out of the process, eliminating the need for you to understand all of this on your own. For example, Tidal Payment Processing offers transparent service, explaining where their rates come from and how they work. This also means lower rates. Furthermore, Tidal wants merchants to understand how payment processing works, and how their system works in general, so they work with you to make sure you have the necessary education beforehand and support throughout. So while there are a lot of things for merchants to understand about credit card processing, if you find the right processing company, you may save yourself a lot of confusion, time, and, not to mention, money.