Merchant Processing 101

By Erin Kroll, PR/VAR Marketing Coordinator - e-onlinedata 

There are countless reasons why a business should add credit card and
electronic payment processing capabilities — transactional speed, convenience,
increased customer satisfaction, improved cash flow, views into sales data and
more. But perhaps the most important consideration is the sheer volume of
consumers who use non-cash methods as their primary form of payment.

 In 2005, credit card and electronic transactions accounted for an
overwhelming $3.4 trillion of total U.S. payments, according to The Nilson
Report. That’s 50 percent of all transactions nationwide for that year. More
recently, Visa USA estimated that nearly 60 percent of U.S. consumers aged 18 to
25 use cards as their primary payment method.

 So while the reasons for adding payment processing are clear, understanding
all your options and which are right for your business is far more complex. This
article will give you the information you need to get started in setting up
payment capabilities for your business, and it will provide some of the
essential details you need to consider when selecting a provider.  

 How Payment Processing Works

Some form of the modern credit card has been in use since the late 19th
century, mostly as department store charge cards representing lines of credit.
Things have changed and today, the step a merchant needs to take in order to
accept credit card payments is to establish a merchant account with a bank or
third-party payment provider. Once your account is live, the transaction process
generally works as follows: 

 1.      A customer presents a credit card for
payment.

 2.      By swiping the credit card through an
electronic point-of-sale (POS) transaction terminal, typically provided by the
bank or payment provider, an electronic request is submitted to the processing
network for authorization.

 3.      The processing network receives your
electronic request and determines if the cardholder’s account is valid and if
the funds are available. If so, a response called an "authorization code" is
transmitted, guaranteeing your access to the funds.

4.      A receipt is then printed for the
customer using the POS terminal or your computer. The customer then signs the
receipt and, for their part, the transaction is complete.

5.      At the end of the business day, a
merchant will electronically submit a final request to the processing network to
"capture the funds" for all authorized transactions in a given day. This process
is referred to as settlement. Once approved, a response is generated to your
electronic terminal or computer.

6.      From there, the funds associated with
the batch you settled are deposited electronically into your business bank
account, usually within 48 to 72 hours. Typically, the rate and any fees paid to
your merchant account provider are deducted from your account at the end of the
month.

7.      At the end of the month, your merchant account provider will send a
statement to you, detailing the credit card activity for the month and the
associated fees you’ve been charged.

This process describes what happens in a traditional retail, or “bricks and
mortar” sales environment. For Internet and e-commerce merchants, the set-up
process requires a few additional steps.

Retail Terminals vs. e-Commerce Processing

Because they do not have access to the purchaser’s physical card, Internet
and e-commerce merchants rely on specialized software that allows them to
capture and process credit card information on their Web sites instead of
through a POS terminal. There are two basic software programs needed to enable
online commerce:

·        Shopping Cart: A secure series of scripts (or coding) that keep
track of items a visitor chooses to buy from a site until they proceed to
checkout. On the checkout screen, the shopping cart collects the credit card
number, billing address, authorization number and expiration date.

·        Payment Gateway: When the online shopper is ready to finalize the
transaction, the information collected in the shopping cart is transferred to a
payment gateway for authorization. It is the equivalent of a physical POS
terminal used in a retail setting.

Another situation where a purchaser’s card is not physically present happens
with MOTO or Mail Order and Telephone Order. Here, touch-tone processing or an
automated response unit (ARU) allows for credit card authorization and
processing over the telephone. This type of processing does not require a
shopping cart or payment gateway.

Pricing Basics

Now that you know how processing works and what the available options are,
you’re probably wondering how much all this will cost. While service fees and
rates vary from provider to provider, “bundled” pricing is the most common type
of agreement used in determining which per-transaction rate applies to which
type of merchant. In the simplest terms, pricing is based on risk:
the higher the risk involved in the transaction, the higher the rate the
merchant will have to pay:

·       
Qualified Rate applies primarily to card-present or
traditional card-swipe (not key-entered) transactions. This is the lowest
possible rate a merchant will incur when accepting a credit card. Telephone and
e-commerce transactions cannot receive the qualified rate because they are
unable to swipe a customer’s card.  

·       
Mid-Qualified, or partially qualified rate, is the
percentage a merchant will be charged if they accept a credit card that does not
qualify for the lowest rate. This may happen if a consumer credit card is keyed
into a credit card terminal, virtual terminal (online) or via a shopping cart.
 This is the best rate that a telephone or e-commerce business can receive.

·        
Non-Qualified is the highest percentage rate a merchant can be
charged and applies to those transactions posing the greatest amount of risk.
This rate would apply if a special kind of credit card is used like a rewards
card or business card or if address verification is not performed, or a merchant
does not settle its daily batch within the allotted time.

Again, these rates are used
to determine the cost to the merchant on a per-transaction basis. There are
additional costs associated with payment processing, including start- up fees,
equipment costs, chargeback fees and more. Stay tuned for the next e-newsletter
installment for additional processing tips and useful information for merchants
and business owners.

e-onlinedata (EOD) is the
nation’s fastest-growing, most trusted provider of online payment solutions.
Thousands of Internet, mail order, auction sellers and retail businesses — from
start-ups to billion-dollar companies — are choosing EOD every month for
affordable, reliable, and easy-to-use credit card processing and Authorize.Net
payment gateway solutions.

Merchant Processing 101 is a
production of e-onlinedata, reprinted with permission from e-onlinedata. Content
is intended to provide merchants and small business owners with practical
information and insight into the world of payment processing.

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