The Merchant Processing Guru

The Merchant Processing Guru Tip#20: What is the flow of a credit card processing transaction?

When you process a transaction what really happens in those few seconds that you are waiting for an approval or decline on that card? Well, whether you swipe the card or key it in on some other system the flow is the same. A line of communication is opened up and information is sent to the acquiring bank to say that a transaction for this amount on this card holder’s card is being requested for this merchant account. Then the acquirer’s computer will then contact the issuing bank to verify the account information and that the card holder has enough credit for the transaction to be approved. Then the approval is sent back to the acquirer from the issuing bank and the acquirer issues an approval number for the transaction. A receipt is then generated with this information and the transaction is complete. This is called the “front end” of the process.

The “back end” of this process happens at the end of the day where all the transactions from that day are grouped together “batched” and settled through the acquiring bank for deposit into your account. The Acquirer also sends transaction information to MasterCard and Visa on a daily basis, which will reconcile the incoming information and route them to the appropriate card issuers overnight. The card issuer will then post the transaction to the cardholder’s account for payment.

The Merchant Processing Guru Tip#19 Continued: The Players in the Credit Card Processing Industry.

To be approved to accept credit cards a merchant will approach a “Member Service Provider” or MSP who are approved & registered entities with Visa & MasterCard to offer processing services. Behind them is the “Acquirer” or “Acquiring bank”. The Merchant Acquirer basically coordinates the flow of information and money between the different players, namely the cardholder and their bank and the merchant and their bank. On the front end they use a “payment network” to processes the individual transactions between the cardholder and the merchant (also known as a payment platform). I will get into the actual flow of the transaction in a later post. On the back end network they settle the transactions into a lump sum to be deposited into the merchants account. This is referred to a settlement or batch. A card issuer cannot be an acquirer even though they are both banks, This is why you cannot go “direct” with your bank! This is also how the two separate interests of the cardholder and the merchant are kept apart.

Where do I fit into all this? I represent the Merchant and the Member Service Provider. I am a merchant advocate and it is my job is to make sure that you have the right solution for your particular business needs and to represent you in a dispute between you and the MSP. This is not to be confused with a dispute between you and the cardholder, that is the MSP who then represents you.

Russell Harverson has over 6 years experience in the card processing industry and has build a reputation for “being there” for all his merchants! His goal is to provide you with the right, cost effective processing solution for your individual business needs, no matter how large, small or different, he has done it all. He is your Guru of the Merchant Processing industry, shedding light on the credit card processing industry. To contact him via email theGuru@theMerchantProcessingGuru.com
Or call him at: 1-888-368-GURU (4878)

The Merchant Processing Guru Tip#5: How Interchange works… The foundation of the credit card processing industry is Interchange. Understanding Interchange is the first step to truly grasping how this industry works. As I mentioned in my last post, Interchange is set by the Associations; Visa & MasterCard. It is comprised of the fees that the issuing bank (the bank who issues the credit card) and Visa or MasterCard charge the merchant for taking that card. It is from here that the processor marks up those fees, how they do that is what makes all the difference to you, the business owner.

When you run a transaction in your business you probably have no idea what card type you are running, you just run it. It could be any number of the 70+ rates that Visa or MasterCard have in the interchange system. The key is not to pay too much for any of these card types. In a tiered rate account, as an example, you could run a card that costs 2.39% to the processor but because they treat it as a Non-qualified transaction you will actually pay 3.29% a whole 0.9% more than their cost. This adds up fast and is far more important to reign in than any of the miscellaneous fees associated with a merchant account. By using a processor who gives you a true pass-through of interchange, with a standard “across the board” markup you can guarantee that you will not pay too much for your processing. Take for instance a markup of 0.2% across the board on interchange. On $10,000 you know that 0.2% of that is $20.00 that you will pay to the processor on top of interchange. You have to pay interchange no matter what! It is how much you pay above interchange that matters.

A typical 3 tiered rate structure could look something like this for example:

Qualified rate: 1.63% + $0.25
Mid-qualified rate: 2.49% + $0.25
Non-qualified rate: 3.29% + $0.25

This means, anything that falls between the 1.63% & 2.49% will be charged the 2.49%. I call these buckets. As another example of this and to demonstrate this point a “Rewards 1” level credit card is 1.74% cost but you will pay 2.49% because it falls between the qualified and mid-qualified rate tiers.

If you paid an average of 0.50% – 0.75% on $10,000 with a tiered rate structure because of the constant downgrading to a higher “bucket” called mid-qualified and non-qualified you would pay $50.00 – $75.00 instead of the $20.00 with a true interchange system. That is $30.00 – $55.00 more than you should be paying in this area alone. This of course is only an example but used to demonstrate the difference having the right set-up can make to the fees that you will pay for processing cards. It is also only one of the areas that make a difference to those fees. Stay tuned and I will share more tomorrow, or call me if you are ready to see a true analysis of your merchant statement: 888–368-4878