For anyone looking to become a merchant in any kind of marketplace, it will be critical for you to understanding the basics of what credit card processing is, how it works, and how it will affect your bottom line. In this article, we will discuss the basics of this topic.
The Basics: Banks, Card Sponsors, and Payment Processors
When you decide to accept credit cards as a method of payment at your business, you are actually deciding to engage in an incredibly complex process. As a result, we will need to outline the steps of what happens every time you accept a Credit Card Processing transaction.
There is a bank that issues the card, and there is a card sponsor. Sponsors are companies like Visa and Mastercard, and the bank could be Wells Fargo or Bank of America. In some cases, a bank can be both the issuer and the sponsor (i.e. Discover) The bank takes the risk of lending the money to the buyer, while the card sponsor deals with part of processing the transactions that the buyer makes.
When a buyer chooses to make a purchase with his credit card at your store, the card sponsor is going to charge you a fee for interfacing with the customer on your behalf. This fee is usually a flat fee of about $.30 plus 2.9% on the total purchase. This is the cost that you pay to allow credit cards be used at your business.
Of course, different card sponsors charge different fees (whether higher or lower), so it is up to you to decide which card types (i.e. Visa, Mastercard, American Express, Discover, etc.) you are going to allow to be used at your business, but the more types of credit cards that that you allow, the more likely you are to receive more customer volume.
Finally, the actual terminal that you accept transactions on must be purchased by a sort of clearinghouse company that interfaces on your behalf with the card sponsor to make sure that your transactions are recorded appropriately and that helps you in the case of an error. These gateway companies will charge you a percentage fee in order to provide their services.
Our Goal is to Bring Fees Down
Quite naturally, this entire process can be quite expensive, costing you as much as 3-4% of each transaction. That might not seem like a lot of money, but when you multiply 5% by one thousand transactions, it really starts to eat away at your bottom line. Therefore, it is prudent for anyone who is looking to start a business that accepts credit cards to check the lists put out by Merchant Maverick and Cardfellow to see which companies offer the lowest rates at the beginning and then every couple of years thereafter.