If you own a business, it is not unusual to come across the dilemma of whether or not you should accept credit cards. On the one hand, the processing of payments through credit or debit cards seems to cut through your hard-earned profit. On the other hand, it gives customers more payment options and, as a result, much more convenience at the time of payment. Also, newer payment methods, such as e-wallets, online transactions, and card-based transactions seem to be gaining immense popularity. Because of the pandemic that broke out in 2020, cashless and contactless transactions have become exponentially more popular. Therefore, the acceptance of credit cards and alternative payment methods can be meant for the growth of your business.
What Entities are involved?
When a customer pays for the goods or services using cash, the only two entities involved are the merchant and the customer. But the processing of credit cards is not as simple as just taking money from a customer. There are multiple parties involved, and each of them plays a unique role;
Merchant
The retail owner or the person who owns a business looking for a payment processor to accept credit cards is the merchant. Merchants are the clients of payment processors.
Merchant Service Provider
This entity is the payment processor that is providing credit card processing to the merchant. They act as the middle-men between the merchants, issuing banks, and the credit card associations and ensure that the merchant’s payments are processed smoothly. Initially, a merchant service provider role was to provide a merchant account and help the merchant with processing payments. But soon, they expanded to providing a wide variety of assistance to the business of the merchant.
Cardholder
The original owner to whom the credit or debit card belongs is the cardholder. The cardholder is the customer in the process of the transaction. The funds are to be deducted from their bank and sent to the merchant ultimately.
Credit Card Association
Credit card associations originally started operating with collaborations with different banks. But in 1970, two of the most major card associations, Visa and Mastercard, combined their services to give a better and more convenient experience to all the entities involved. Credit card associations communicate between the issuing bank and the merchant services provider, and for that, they charge an interchange and network fee. The most common associations in the US are Visa, Mastercard, Discover, and American Express. The interchange rate of each association is differently designed.
Acquiring Bank
This is a type of mediator bank that stores the funds from a transaction. This bank belongs to the merchant and is provided by the payment processor. As soon as a sale is authorized, the funds are deposited in the merchant account, known as the acquiring bank. Then the funds are later transferred to the business bank account of the merchant.
Issuing bank
This is the bank that issues the card to the cardholder. These banks are part of credit card associations and issue cards under the name of the association. The issuing bank pays the acquiring bank for the purchase made by the cardholder once it is approved. The amount is then paid by the cardholder to the issuing bank, later on, based on the terms of the credit card. In the case of a debit card, the funds are immediately deducted from the cardholder’s account.
Fees for Credit Card Processing
Finally, now that you know all the parties involved in the processing of credit cards and what they do, we can discuss the fees affiliated with credit card payments. All payment processors don’t have the same billing model; instead, the fees you pay for processing can vary significantly from processor to processor. To understand which suits you best, you need to know the types of costs.
Transactional Fees
These fees are charged to the merchant for each transaction they make. These fees include the interchange fees and the fees charged based on the amount of the transaction. These fees are compulsory for the merchant to pay, as they are decided at the end of the credit card association, so the merchant services provider cannot waive them off. The interchange rate depends on the association of the card you are using. With more perks and benefits an association gives for their card, the interchange fees you will have to pay for their card will rise.
Recurring Fees
These are fees that merchants charge for the reason of providing their services. You can see these fees on the statement provided by the payment processor. These fees are not usually needed for the payment processing to undergo and are sometimes a means to make money from the merchant. A merchant needs to keep a keen eye to ensure the payment processor is not overcharging them.
Instance-based Fees
These are fees that are charged on the instance of a specific task. There are several types of these fees, ranging from setup fees, fees for early termination, and even maintaining PCI Compliance. An example of this is address verification fees. AVS is charged when the cardholder does not swipe or dip their card in the card reader because of the card’s unavailability or lack of hardware. The cardholder’s address needs to be verified by the MSP to ensure the authenticity of the transaction at the end of the issuing bank. Merchants can avoid this fee if addresses of repeat customers are noted down.
With all that said, it is imperative to make sure that you are not being charged unduly by the payment processor. Some try to charge using hidden fees, and a vague or unclear statement or lack of transparency in fees is the primary indicator for such a fee. Being alert can save you more money than you think!