What Do Credit Card Processing Companies Do: A Beginner’s Guide

The way we pay for goods and services has transformed dramatically. As more customers take advantage of various credit card perks and advantages offered, credit card processing companies become more integral. They allow consumers to complete transactions swiftly and securely. But what processes and technologies do these companies utilize to facilitate such transactions?

This beginner’s guide explores the essential functions of credit card processing companies, breaking down the payment process into manageable steps. We’ll look at how these companies connect merchants with consumers, their technology to keep transactions secure, and the various services they offer to help businesses grow.

Understanding the role of credit card processing companies can empower you to make informed decisions as a business owner or consumer, paving the way for smoother and more efficient financial interactions.

Understanding Credit Card Processing

Credit card processing is the mechanism that enables businesses to accept payments made via credit and debit cards. At its core, the process involves several key players and steps that work together to ensure transactions are completed securely and efficiently.

The Transaction Process

The transaction process involves several stages. First is authorization. When a cardholder makes a purchase, the merchant sends the transaction details to the payment processor, which then communicates with the card network like Visa or MasterCard to request authorization from the issuer. The issuer verifies the cardholder’s identity and checks for available funds or credit before approving or declining the transaction.

Once authorized, the next step is settlement. The transaction is processed, and funds are transferred from the cardholder to the merchant’s account. This process may take a few days to complete. Finally, during the funding phase, the merchant receives the funds, minus any processing fees charged by the payment processor and acquirer.

Security Measures

Security is a top priority in credit card processing. One key measure is encryption, where sensitive data, such as card numbers and personal information, is encrypted to protect against fraud during transmission. Another important security method is tokenization, which replaces sensitive data with a unique identifier or token, adding an extra layer of security. Furthermore, credit card processors must adhere to Payment Card Industry Data Security Standards (PCI DSS) to ensure the secure handling of cardholder information.

Key Participants in Credit Card Processing

Understanding the key participants in the credit card processing ecosystem is essential to grasp how transactions are completed smoothly and securely. Each participant plays a vital role in ensuring that payments are processed efficiently.

Cardholder

The cardholder uses a credit or debit card to make purchases. They initiate the transaction by providing their card information online or in person. Cardholders rely on the security and convenience that credit card processing offers, enabling them to complete transactions with ease.

Merchant

The merchant is the business or individual selling goods or services. Merchants accept credit and debit card payments and rely on credit card processing companies to facilitate these transactions. Merchants must choose a payment processor that suits their needs, considering factors such as transaction fees, security features, and integration capabilities with their existing systems.

Acquirer

The acquirer, known as the merchant bank, is the financial institution that partners with the merchant to process card payments. The acquirer provides the necessary infrastructure and services to enable the merchant to accept credit card transactions. They also play a role in risk management, ensuring that transactions are legitimate and monitoring for fraudulent activity.

Card Issuer

The issuer is the bank or financial institution that issues credit or debit cards to cardholders. When a cardholder makes a purchase, the issuer is responsible for verifying the cardholder’s identity and checking available funds or credit limits. They also handle billing and payment processing for the cardholder and may offer rewards or benefits associated with card use.

Payment Processor

The payment processor facilitates communication between the merchant and the acquirer. They manage the technical aspects of payment transactions, ensuring the data is transmitted securely and efficiently. Payment processors also provide tools for merchants to manage transactions, track sales, and access reporting features.

Card Networks

Card networks, such as Visa, Mastercard, and American Express, operate the infrastructure that connects issuers and acquirers. They set transaction rules, facilitate the authorization process, and help resolve disputes between cardholders and merchants. Card networks also provide security standards and compliance guidelines for safe transaction processing.

How Credit Card Processing Works

Credit card processing is a multi-step procedure that enables businesses to accept card payments.

Transaction Initiation

The process begins when a cardholder purchases a merchant’s point of sale (POS) system, either in-person or online. In-store, the cardholder swipes, taps, or inserts their card; online, they enter their card details.

Authorization Request

The merchant’s payment system sends an authorization request to the payment processor, which forwards it to the relevant card network (e.g., Visa or Mastercard).

Verification by Issuer

The card network routes the request to the cardholder’s issuer. The issuer verifies the card's validity, checks for available credit or funds, and conducts fraud checks.

Authorization Response

The issuer sends an authorization response back through the card network to the payment processor, either approving or declining the transaction. If approved, it includes an authorization code.

Completion of the Sale

If the transaction is approved, the merchant completes the sale, providing goods or services to the cardholder. The transaction is now complete, but the fund transfer will happen later.

Transaction Settlement

At the end of the business day, the merchant initiates a settlement process, aggregating all authorized transactions and sending them to the card networks for processing.

Funding

The card networks communicate with the respective issuers to transfer funds to the acquirer (merchant bank), which deposits the amount, minus processing fees, into the merchant’s account.

Reporting and Reconciliation

Both merchants and payment processors provide reporting tools to track sales, manage disputes, and reconcile accounts, helping maintain accurate financial records.

Choosing a Credit Card Processing Company

Selecting the right credit card processing company is a crucial decision for any business, as it can significantly impact your operations, costs, and customer experience. Here are key factors to consider when evaluating your options:

Fees and Pricing Structure

Different credit card processing companies have varying fee structures. Common fees include transaction fees, monthly service fees, chargeback fees, and equipment costs. It’s essential to understand whether the company charges a flat rate, tiered pricing, or interchange-plus pricing. Compare these costs across several providers to find the best fit for your business.

Contract Terms

Examine the contract terms offered by potential processing companies. Look for details regarding contract length, cancellation fees, and any hidden charges. A transparent and flexible contract will give you more control over your payment processing without locking you into unfavorable conditions.

Payment Processing Technology

Evaluate the technology and tools provided by the credit card processor. This includes the compatibility of their systems with your point-of-sale (POS) hardware and software. Additionally, check for features like mobile payment capabilities, virtual terminals, and online payment gateways, which can enhance your business’s efficiency.

Security and Compliance

Security is paramount when handling payment information. Ensure the processing company follows the Payment Card Industry Data Security Standards (PCI DSS). Look for features like encryption, tokenization, and fraud detection tools to protect your customers’ sensitive data.

Customer Support

Responsive and knowledgeable customer support is essential, especially during technical issues or transaction disputes. Research the level of support offered—such as 24/7 availability, online resources, and dedicated account managers—to ensure you have access to help when needed.

Integration Capabilities

Consider how well the credit card processing company integrates with your existing systems, such as accounting software, e-commerce platforms, or inventory management tools. Seamless integration can streamline your operations and reduce manual data entry.

Reputation and Reviews

Research the reputation of the processing companies you’re considering. Look for customer reviews and testimonials to gauge their reliability and service quality. Industry ratings and awards can also provide insights into a company’s performance.

Additional Features

Some credit card processors offer additional features that can benefit your business, such as loyalty programs, recurring billing options, or advanced reporting and analytics tools. Determine if these features align with your business needs and goals.

By carefully evaluating these factors, you can choose a credit card processing company that meets your business requirements, supports your growth, and provides a positive payment experience for your customers. Researching and comparing options will ultimately contribute to your business’s success in a competitive marketplace.

Payment Processing Equipment and Systems

Selecting the right payment processing equipment and systems is essential for facilitating seamless transactions in your business. Your technology impacts how efficiently you can accept payments, manage sales, and provide a good customer experience.

Point of Sales (POS) Systems

POS systems are comprehensive solutions that enable businesses to process transactions, manage inventory, and track sales. They typically include hardware (such as a cash register or tablet) and software designed for payment processing. Modern POS systems often support multiple payment methods, including credit cards, debit cards, mobile wallets, and contactless payments.

Card Readers

Card readers capture card information and allow businesses to process transactions. They come in various forms:

• Swipe Readers: Basic devices that read the magnetic stripe on a card.

• EMV Readers: Support chip cards (EMV technology) for enhanced security.

• Contactless Readers: Allow customers to make payments by tapping their cards or smartphones.

Many card readers can connect to mobile devices via Bluetooth or USB, making them suitable for businesses on the go.

Mobile Payment Solutions

Mobile payment solutions enable businesses to accept payments through smartphones or tablets. These solutions often utilize card readers that connect to mobile devices and include apps for managing transactions. They are particularly useful for small businesses, pop-up shops, and vendors who operate in various locations.

Virtual Terminals

Virtual terminals are web-based applications that allow businesses to process payments online without requiring specialized hardware. These systems are ideal for e-commerce businesses, as they enable merchants to enter card information manually and accept payments directly through their websites. Virtual terminals also benefit businesses that take orders over the phone or via mail.

Payment Gateways

Payment gateways act as intermediaries between your business and the payment processor. They encrypt sensitive card information during transactions and facilitate communication between your website and the bank. Choosing a reliable payment gateway is essential for online businesses, as it ensures secure and smooth payment processing.

Self-Service Kiosks

Self-service kiosks allow customers to complete transactions independently, such as ordering food, checking in at airports, or purchasing tickets. These systems enhance customer experience by reducing wait times and freeing staff for other tasks. Kiosks can integrate various payment options, including card payments, mobile wallets, and cash.

Inventory Management Systems

While primarily focused on inventory control, many modern inventory management systems integrate payment processing capabilities. These systems enable businesses to track stock levels, manage orders, and process payments simultaneously, streamlining operations and enhancing efficiency.

Security Features

Investing in secure payment processing equipment is crucial to protect sensitive customer data. Look for systems that offer encryption, tokenization, and compliance with PCI DSS standards. Some devices may also include built-in fraud detection tools to enhance security further.

Fees for Processing Credit Cards

When accepting credit card payments, businesses encounter various fees that can impact their overall costs. Understanding these fees is essential for making informed decisions about payment processing solutions.

Transaction fees are charged for each processed payment and vary based on the provider and transaction type. These fees may be structured as flat rates, tiered pricing, or interchange-plus pricing. Many credit card processing services have monthly fees for account maintenance, which can cover services like customer support and reporting tools. Businesses should also be aware of potential setup fees, which are one-time charges for establishing an account and providing necessary equipment.

Further costs include chargeback fees, incurred when customers dispute transactions, and cross-border fees for international payments. If accepting payments in multiple currencies, businesses may face currency conversion fees as well. Merchants must comply with PCI DSS standards, which may involve additional PCI compliance fees. By understanding these various fees, businesses can optimize payment solutions and manage costs effectively.

Reducing Credit Card Processing Costs

Credit card processing fees can significantly impact a business’s bottom line. Fortunately, there are several strategies to reduce these costs while maintaining efficient payment processing.

Negotiate with Payment Processors

One of the most straightforward ways to lower processing costs is to negotiate with your payment processor. Research competitors’ rates and services to leverage during discussions. Many processors may adjust fees to retain customers, especially if you present a solid case for lower rates.

Choose the Right Pricing Model

Understanding the different pricing models—flat rate, tiered pricing, and interchange-plus pricing—can help you select the most cost-effective option for your business. For example, interchange-plus pricing can often provide lower costs for businesses with higher transaction volumes. Evaluate your transaction patterns to determine which model aligns best with your needs.

Optimize Transaction Methods

Encouraging customers to use lower-cost payment methods can reduce processing fees. For example, accepting debit cards or ACH transfers typically incurs lower fees than credit cards. Additionally, minimizing key-entered transactions (like phone orders) can help avoid higher costs associated with manually entered payments.

Maintain PCI Compliance

Ensuring compliance with Payment Card Industry Data Security Standards (PCI DSS) can prevent costly fines and chargeback fees. Regularly review your security protocols and ensure your systems are up-to-date. Many processors may also offer lower fees for businesses with robust security measures.

Monitor Chargebacks

Excessive chargebacks can lead to higher processing fees and potential penalties. Implement strategies to minimize chargebacks, such as clear return policies, thorough customer communication, and better transaction descriptions. Keeping your chargeback rate low can help maintain favourable processing rates.

Review Processing Statements Regularly

Regularly reviewing your processing statements can help identify hidden fees or discrepancies. Understanding your fee structure and monitoring changes over time can provide insights into potential savings. If you notice unexpected charges, contact your processor for clarification.

Leverage Technology

Investing in advanced payment processing technology can streamline operations and reduce costs. For example, using integrated POS systems can help manage transactions efficiently, while mobile payment solutions can reduce the need for physical infrastructure. Additionally, utilizing tools for tracking and managing transactions can help identify areas for cost savings.

Popular Credit Card Processors

Choosing the right credit card processor is essential for efficient transactions and security. Here are some popular options:

• Square: Ideal for small businesses, Square offers transparent flat-rate fees, mobile card readers, and POS systems with no monthly fees or long-term contracts.

• PayPal: A global payment processor known for e-commerce and in-person transactions, PayPal is versatile with a straightforward fee structure and strong online integration.

• Stripe: Popular among online businesses, Stripe offers extensive API capabilities, supports multiple payment methods, and excels in security, making it ideal for international operations.

• Shopify Payments: Fully integrated with the Shopify platform, this processor simplifies payment handling for e-commerce businesses, avoiding extra transaction fees.

• Clover: A flexible POS system that provides hardware and software solutions for physical and online payments, with scalability and customizable tools for businesses like retail and restaurants.

• Fiserv (First Data): A leader in payment processing for businesses of all sizes, Fiserv’s Clover POS system is widely used for its reliability and scalability.

• Helcim: Known for transparent pricing and no long-term contracts, Helcim is great for small to medium-sized businesses with higher transaction volumes.

• Worldpay: A global processor with a broad range of solutions for in-store, online, and mobile payments, suited for businesses with international operations.

Businesses can select the best processor to meet their needs by comparing features and pricing structures.

Frequently Asked Questions

What is a credit card processing company?

A credit card processing company handles the transactions between a business, its customers, and the banks involved. These companies facilitate payment approval, transfer, and settlement when a customer purchases using a credit or debit card.

What fees can I expect from a credit card processing company?

Typical fees include transaction, foreign transaction, monthly service, setup, chargeback, and PCI compliance fees. Fees can vary depending on the provider and pricing model, so it’s important to understand the full cost structure.

What's the difference between flat-rate, tiered, and interchange-plus pricing?

• Flat-rate pricing charges the same fee for all transactions.

• Tiered pricing categorizes transactions into different rates (e.g., qualified, mid-qualified, non-qualified) based on factors like the type of card used.

• Interchange-plus pricing adds a small markup to the card network interchange fees.

How can I reduce credit card processing fees?

You can negotiate with your provider, choose the most appropriate pricing model, encourage lower-cost payment methods, and maintain PCI compliance to avoid penalties.

What are the steps to apply for a business credit card?

To apply for a business credit card, you’ll typically need to:

• Provide business information, such as your Business Number (BN) issued by the Canada Revenue Agency (CRA) or Social Insurance Number (SIN) for sole proprietors.

• Demonstrate a good personal or business credit history.

• Meet income, revenue, and credit score requirements specified by the credit card issuer.

What should I look for in a business credit card?

Weight the pros and cons of credit cards carefully before applying for one. Look for features like cash back rewards, low interest rates, no annual fees, high credit limits, and additional perks like travel benefits or purchase protection that align with your business needs.

Your business credit card options may include balance transfers, which allow you to transfer high-interest debt from one card to another at a lower rate. If your business is new or has a limited credit history, you might consider secured credit cards, which require a security deposit and can help your company build credit.

What happens if my business card gets declined?

If your business credit card gets declined, it could be due to an insufficient credit limit, fraud detection, an expired card, or overdue payments. Check your account for available credit or alerts, and contact your card issuer to resolve the issue, whether it's clearing a balance, activating a new card, or addressing potential fraud holds.

Apply for a KOHO Credit Card Today

Applying for a KOHO credit card is a great step toward smarter financial management. With KOHO, you can easily build your credit with KOHO by using their credit-building tools. You'll also have access to a free credit score to track your progress. KOHO’s virtual credit card offers instant approval for secure online shopping, and you can enjoy added security with overdraft protection coverage.

KOHO also helps you grow your savings with a high-interest savings account while offering plans for spending and saving that keep you on track. Apply today to start enjoying these benefits and take control of your financial future.