Most businesses today accept credit/debit card payments. Consumers use them as a normal and natural part of daily life. It was still fairly common a generation ago for businesses to refuse the use of credit cards. Today, you’re more likely to get a look of surprise if you tell a cashier that you’ll pay in cash. In spite of this, credit card processing is a mystery to many people. Because accepting credit card payments involves a certain amount of risk that needs to be addressed, it’s important for businesses to have at least an overall knowledge of what’s involved.
Credit card processing can be divided into three basic steps: authorization, authentication, and settlement. Let’s take a brief look at each. (There may be slight differences in processing between transactions made in person at a shop, etc., and transactions made online, but the basic steps are generally the same.)
When you swipe (or tap/insert) your credit card in a card machine at a store or other business, or enter your card information in the case of online purchases, the card information and details of the transaction are encrypted and sent to the merchant’s bank (the acquiring bank). The acquiring bank then forwards the information to the applicable card association (e.g., Visa, Mastercard, American Express, Discover, etc.) with a request for authorization. From there, the information is sent to the bank that issued the card. The final step in authorization (the decision to approve or decline use of the card for the transaction) is conducted by that bank.
Authentication is the process of verifying that the credit card used in a transaction is the real thing and is being used by an authorized user. Strictly speaking, authentication is part of authorization. However, the elements of authentication are important enough—and authentication is, in fact, the core element of the approval process—that viewing it as a separate step may be helpful.
When the bank that issued the card receives the card/transaction information, it compares that information to its own records to ensure that the two sets of information match. The issuing bank also confirms that the cardholder has enough available credit to cover the purchase and that there are no restrictions on the cardholder. If a debit card is used, the bank confirms that the balance in the cardholder’s account will cover the purchase. If there are no problems, the bank approves use of the card for the transaction. If there is a problem, the bank declines use of the card.
The issuing bank sends its judgment (approve or decline) to the card association, which then forwards it to the merchant’s credit card machine (or website, etc., in the case of online transactions). The judgment will be displayed to the customer and merchant, and if the card has been approved, the cardholder can finalize the purchase. The transaction must be finalized while the response code is stored in the merchant’s machine or system. If there is too much of a delay, it may be necessary to redo the transaction.
That all sounds like a lot, but because it is done electronically and most of it is automated in the system, it is an almost instantaneous process that is limited only by the speed of the servers and the network. In most cases, it takes only a few seconds.
Settlement is the final step of credit card processing. Put simply, it is the process of transferring funds from the cardholder’s account to the merchant’s account. However, behind that simple step is quite a bit of interaction between the merchant, the acquiring bank, the card association, and the issuing bank. It is also the step in which processing fees are charged to the merchant.
The credit card transactions that have been approved are stored in the merchant’s system, and at a certain point (usually the close of business that day), the information is all sent to the acquiring bank in a single batch.
The acquiring bank’s system does two things at this point. First, it confirms each authorization, groups them into batches for individual issuing banks, and sends the batches to the appropriate banks via the card association. It may be helpful to think of this as a request from the merchant’s bank to the customer’s bank for payment.
The acquiring bank’s system also deposits the purchase amount into the merchant’s account, after first subtracting processing fees, if applicable. If this occurs before the customer’s bank has sent the payment to the merchant’s bank, the acquiring bank is actually assuming a certain amount of risk, since it is possible (although uncommon) that the customer’s bank will not make the payment or that payment will be delayed more than normal.
The issuing bank sends the payment to the card association, which in turn debits the issuing bank the applicable amount and credits the acquiring bank. The role of the card association is similar to that of a central processing unit in a computer, in that it receives requests, notifications, payments, responses, etc., from various sources and routes them to the appropriate destination.
The funds are usually taken from the cardholder’s account automatically in the case of a debit card, but in the case of a credit card, the cardholder is typically billed for the relevant amount (including fees and interest, if applicable) and pays the issuing bank at a later date. Although the bulk of the process is conducted electronically, it may take one to three business days for the transaction to be reflected in all of the accounts that are involved.
If there are no problems or restrictions, and the acquiring bank’s system deposits the purchase amount into the merchant’s account at the time it sends the information to the issuing bank via the card association, the merchant will receive payment fairly quickly. However, in the case of a high-risk business, the bank may set restrictions and not deposit funds into the merchant’s account until it has received payment from the issuing bank. Contact your bank or payment processor to find out what rules and regulations are in place.
Accepting credit card payments has a variety of advantages, including convenience, the ability to make purchases and payments remotely, consolidation of payments, and greater access to purchase records. There are, however, certain drawbacks and risks involved in accepting credit card payments. One disadvantage is the cost resulting from credit card processing fees, membership fees, and other related fees. There are various ways to minimize this cost, such as efficient grouping of charges. Practically speaking, however, a certain degree of cost here is unavoidable as long as you accept credit card payments.
The two main risks of accepting credit card payments are disputes (chargebacks) and fraud. These have been addressed at length in other articles. For details, you may want to start here, here, or here.
If you are operating a high-risk business, it is also a good idea to use a 3D Secure gateway to authenticate purchases. There are a variety of other security features offered by banks and payment processors, as well specialized solution providers. It is important to implement basic security measures starting on the first day your business is in operation, of course, but you should also spend enough time looking into the measures that will be best for your business and specific circumstances. Our staff at Zen Payments is available to help you with that process.
Smooth, efficient, and reliable credit card processing combined with an easy-to-use and secure payment gateway and customer interface can go a long way toward providing your customers with a satisfying experience that may greatly increase the possibility of repeat purchases. That means increased revenue and more stable cashflow.
It can also relieve a lot of your worries and free up time and money to invest in growing your business. As a high-risk business, you already have certain challenges not faced by other businesses. A high-risk payment processor such as Zen Payments specializes in credit card processing for high-risk industries and understands the unique needs and challenges. We have the experience and expertise necessary not only to get you a merchant account, but also to make the payment process easier for your customers and for you.
When choosing a high-risk payment processor, be sure to ask as many questions as necessary until you’re satisfied with the responses and clear on what you can expect and what will be expected of you. Our team at Zen Payments would be happy to speak with you and find ways to help your business prosper, so please don’t hesitate to contact us.