Tuesday, 29 November 2011

Understanding the Steps of Credit Card Processing

When someone hands over a credit card to a merchant, or enters their credit card information online, they have little knowledge of what happens. All they see is the charge that appears on their statement. The truth is that a lot more is going on behind the scenes during your average credit card processing. Let's look at the steps taken by the typical online purchase.

Ready, Set, Charge

The buyer finds what they wish to purchase and, using an HTML form, enters their name, credit card information, shipping and billing addresses and so on. Once the form is completed properly the buyer submits the data and it heads out to the server for processing.

Processing the Submitted Data

The server receives the information and evaluates that everything is filled out properly and checks for a code that tells it where to forward the incoming request. The server then converts the data to a form which the gateway will understand and moves the information to the gateway. The code also confirms whether or not the credit card is valid and if the transaction can be processed.

Entering the Gateway

Once the information reaches the gateway the card is validated and the user's account is checked to make sure that the required amount is available. If everything checks out then an approval code is provided - and if there is a problem, the card is declined.

For providing this service the merchant is charged. The charge can be assessed per-transaction or on a monthly basis, depending upon the arrangement between the merchant and the service provider.

Transactions are batched at the gateway. Periodically, usually once a day, they are sent on to the clearinghouse. A clearinghouse is a large card issuer such as Visanet, Global or Nova. The clearinghouse determines the type of card used and the bank which issued the card.

Responsible for transferring money from bank to bank, clearinghouses take 2 to 5 percent of every transaction. They move the money from the buyer's account to the merchant's account.

The Merchant Gets Paid

The final step in the process occurs after the merchant's bank receives the funds through the clearinghouse. The bank then transfers money in to the merchant's Card Not Present account.

Why You Should Know

Both as a buyer and a merchant it is important to understand the process. It can take several days for a transaction to move from the pending list to the approved list and if you need funds to move quickly as a merchant, this can help you select a company that batches more frequently; for example. As a buyer, it clarifies why you might need to wait a couple of days to see your order shipped.

Determining what kind of credit card services you choose, as a merchant, will depend on a number of factors, many of them financial, but time can be a valuable asset as well.

Choosing a Provider

When you search for credit card processing services as a merchant, especially one involved in ecommerce, you need to take a good look at all the charges you will encounter. A business that makes many small sales daily will do better with a monthly charge, whereas one that makes fewer but larger sales may opt for a per-transaction arrangement.

Gateway fees can also add up quickly. The difference between 2% and 5% is dramatic when you do $10,000 worth of business in a month. Make a spreadsheet to compare two or three offers and pick the one that is best for your company.

Opening your own business is an exciting and risky endeavor. Credit card acceptance is essential if you are going to serve a broad client base and getting online can make the difference between success and failure.

You may find that you need two service providers, one for the Internet and another for your physical store, but you will only find that out by doing the math. Remember that you are the customer, and barring unusual circumstances, you will be able to find an arrangement that suits your needs.

Michael Rupkalvis owns the Transaction group. The Transaction Group offers credit card processing and other services such as internet merchant account solutions for all types of businesses.

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