How Credit Card Processing Works?

By  //  December 22, 2021

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Credit card processing is the mechanism by which a merchant transmits credit card information to a payment processor in order to receive authorization for the charge and, ultimately, payment for the purchase. The process begins when a customer presents their credit card to the merchant.

The merchant then swipes the card through a credit card reader, which captures the customer’s credit card number, expiration date and other information required to charge the customer.

At that point, a unique transaction ID is generated and transmitted back to the customer with their receipt. The credit card reader then sends this information over a secure Internet connection to the payment processor’s website for verification of funds available in the customer’s account , authorisation from the issuing bank and, finally, approval to charge the customer.

If all goes as planned, the payment processor will then forward the payment amount to the merchant’s bank account.

How Credit Card Processing Fees Work?

In order to process a credit card transaction, merchants typically pay two types of fees: a per-transaction fee and a percentage-based fee. The per-transaction fee, which is typically a few cents, covers the costs associated with transmitting and verifying the customer’s credit card information.

The percentage-based fee, which averages around 2-3% of the purchase amount, covers the costs of funds transfers and other operational expenses. Payment processors typically do not disclose their rates publicly, so merchants typically need to negotiate rates with processors on a case-by-case basis. However, some processors do offer published rates for certain types of businesses.

How Credit Card Processing Benefits Merchants?

Credit card processing offers several benefits for merchants, including:

1. Increased sales – Accepting credit cards allows merchants to reach a larger customer base, as credit cards are widely accepted both domestically and internationally.

2. Increased security – Credit card processing provides a secure way to transmit credit card information, helping to reduce the risk of fraud.

3. Increased efficiency – Credit card processing allows merchants to process transactions quickly and easily, saving time and money.

4. Simplified accounting – Credit card processing allows merchants to account for their sales more easily by providing a clear record of each transaction.

5. Improved cash flow- Credit cards often provide payment to merchants within one business day, simplifying merchant’s cash flow issues and allowing them more time to focus on running their business.

Credit Card Processing Risks

While credit card processing offers many benefits for merchants, it does come with a few risks. First, if the customer initiates a chargeback or disputes the charge following purchase, then the merchant is essentially held responsible for that cost.

Second, in order to accept credit cards online , merchants needs must have a secure website, which can be costly to set up and maintain. Finally, credit card processing rates can be expensive, so merchants should ensure they are getting the best rates possible.

Now that you know how credit card processing works, you can better understand the benefits it offers for merchants. By accepting credit cards, merchants can increase sales, improve security and efficiency, and simplify their accounting.

Additionally, credit card processing can help improve cash flow by providing quick and easy payment for merchants. However, credit card processing does come with a few risks, so merchants should be aware of these before signing up for a processing account.