As a merchant, accepting credit cards as a form of payment is an essential part of doing business in today's digital economy. However, the process of credit card processing can be complex and overwhelming, especially for those who are new to it. In this article, we will break down the basics of credit card processing, including how it works, the fees involved, and how you can reduce your fees.

What is Credit Card Processing?

Credit card processing refers to the process of transferring funds from a customer's credit or debit card account to a merchant's bank account. This process involves several steps, including authorization, verification, and settlement, and has several players involved.

The Players.

The customer. The person paying for your merchandise.

Issuing Banks, they are the source of truth in any credit card transaction.These are the banks that your customer banks with.The bank will approve or deny any credit card authorization request and will check the balance of the customer’s account.The issuing Bank will generally collect Interchange fees on each credit card transaction.

Credit Card Networks.You’ve heard of the card networks, the big players are Visa, Discover, and American Express.They communicate with the banks and businesses using their cards, set terms of use, and will manage the movement of funds.Credit card networks will collect assessment fees on each card transaction.Assessment fees are generally structured as a flat fee + a percentage of the sale.

The Payment Gateway.These are businesses that work behind the scenes to interface with multiple card networks to offer a software solution for Merchants to handle card transactions.Furthermore, many gateways offer reseller services for Payment Processors (see below).A Payment Gateway will typically take 20-40 basis points of a transaction amount.

The Payment Processors.These are the companies that you will most likely work with.They will contract with Payment Gateway to resell their services.The Payment Processor will handle the merchant support should issues arise and will maintain a relationship with the business.A Payment Processor may take 10-30 basis points of the transaction amount.

The Point of Sale.This software (like LiquorTech) will design a system that integrates with the Payment Gateway that the Payment Processor has chosen to work with.From our experience, it is not an easy switch to change Payment Gateway’s, so most Point of Sale companies are only able to offer one or two options for Payment Processors.

Finally, the Acquiring Bank.This is the bank you choose to do business with and will receive the funds from the credit card transaction.You will need to have a merchant account with the Acquiring Bank, it’s a special type of bank account that is able to accept credit, debit, and gift card payments.

How Does Credit Card Processing Work?

The payment process involves several steps:

• When a customer Swipes, Taps, or Inserts their card at the card reader, the Point of Sale will create an Authorization Request.This request is then sent to the Payment Gateway where the transaction is encrypted before sending it to the Payment Processor.
• The Payment Processor then sends the information to a Card Network, which checks with the Customer’s bank (Issuing Bank).The bank will check if the customer has enough funds and will authorize or decline the transaction.If the bank approves the transaction, it will place a hold on those funds, this prohibits the customer from spending that money twice.
• The message will then be sent all the way back to the Point of Sale system which will display the “Approved” or “Declined” message.
• Once a day the Payment Processor will batch the transactions.Batching is the system used to move a large number of transactions from one account to another.For business that have a large transaction volume, batching is a cost-effective solution to move the funds.
  • With LiquorTech, voiding a transaction is done before a transaction has been batched.It is simpler than a refund and simply has the bank remove the authorization hold on the funds.
• Once the batch has finalized, the Payment Process will deposit the funds into your merchant account.

Fees Involved in Credit Card Processing

Credit card processing involves several fees, including:

Interchange Fees: These fees are charged by the customer’s bank (Issuing Bank), for each transaction and can range from 1% to 2%.The interchange fees are used to pay for the bank’s cost to run the card processing service, and more recently have increased to cover the cost of credit card perks (1% cash bank, 2% saving on gas, airline points, etc.).

Assessment Fees or Flat Fees: These fees are charged by the Card Payment Networks for each transaction and can vary depending on the type of business and the processing method.

Transaction Fees: These fees are charged per transaction and can range from $0.10 to $0.30.

Monthly Minimum Fees: These fees are charged if a merchant's transactions fall below a certain minimum threshold.

Annual Fees: These fees are charged annually and can vary depending on the payment processor.

Benefits and Drawbacks of Credit Card Processing

There are many benefits of credit card processing including: convenience, increased sales potential, simpler record-keeping, and reduced risk of theft (from cash sales).According to this Forbes article, customers are twice as likely to spend more money using a card than cash.

However, there are many different businesses involved with each credit card transaction, and each wants a piece of the pie.Rising credit card fees are eating into merchant’s profits and many are trying to reduce the fees and save money.

LiquorTech offers a Cash Discount program, which is our attempt to give Merchants the best of both worlds. You can still accept credit cards while reducing your fees, after all why should you pay for your customer’s airline miles?