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What is Credit Card Processing and How Does it Work?


For anyone looking to become a merchant in any kind of marketplace, it will be critical for you to understanding the basics of what credit card processing is, how it works, and how it will affect your bottom line. In this article, we will discuss the basics of this topic.

The Basics: Banks, Card Sponsors, and Payment Processors

When you decide to accept credit cards as a method of payment at your business, you are actually deciding to engage in an incredibly complex process. As a result, we will need to outline the steps of what happens every time you accept a Credit Card Processing transaction.

There is a bank that issues the card, and there is a card sponsor. Sponsors are companies like Visa and Mastercard, and the bank could be Wells Fargo or Bank of America. In some cases, a bank can be both the issuer and the sponsor (i.e. Discover) The bank takes the risk of lending the money to the buyer, while the card sponsor deals with part of processing the transactions that the buyer makes.

When a buyer chooses to make a purchase with his credit card at your store, the card sponsor is going to charge you a fee for interfacing with the customer on your behalf. This fee is usually a flat fee of about $.30 plus 2.9% on the total purchase. This is the cost that you pay to allow credit cards be used at your business.

Of course, different card sponsors charge different fees (whether higher or lower), so it is up to you to decide which card types (i.e. Visa, Mastercard, American Express, Discover, etc.) you are going to allow to be used at your business, but the more types of credit cards that that you allow, the more likely you are to receive more customer volume.

Finally, the actual terminal that you accept transactions on must be purchased by a sort of clearinghouse company that interfaces on your behalf with the card sponsor to make sure that your transactions are recorded appropriately and that helps you in the case of an error. These gateway companies will charge you a percentage fee in order to provide their services.

Our Goal is to Bring Fees Down

Quite naturally, this entire process can be quite expensive, costing you as much as 3-4% of each transaction. That might not seem like a lot of money, but when you multiply 5% by one thousand transactions, it really starts to eat away at your bottom line. Therefore, it is prudent for anyone who is looking to start a business that accepts credit cards to check the lists put out by Merchant Maverick and Cardfellow to see which companies offer the lowest rates at the beginning and then every couple of years thereafter.

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How Do Credit Card Processing Machines Work?


A credit card processing machine works by detecting the card inserted by a user. Swiping a card over the reader slot allows the machine to automatically read the information in the magnetic strip or chip including the credit card number and the cardholder’s name as well as other personal information. This information is acquired by the credit card machine and prepared for transfer.

Transmitting the Data
Credit card machines are designed to transfer the data they collect to the credit card processor. The software in the machine merges the merchant’s identification number and name with the cardholder’s data. Credit card terminals then transfer this information to the processor’s server through an Internet connection.

Approving the Transaction
Once the card has been swiped and its information processed, the machine either accepts or rejects the transaction. If accepted, the transaction receives an exclusive approval number that ascertains the specific purchase. The machine electronically confirms that the amount used does not exceed the card’s limit, that the user is the right cardholder, and that the card has not expired. Generally, the whole process takes 3 to 5 seconds. Once the transaction has been approved, the credit card machine starts processing receipts on its internal printer with details of the transaction.

Types of Credit Card Swipe Machines
Importance
The credit card has a strip with negative and positive charges. The Credit Card Processing machine interprets the charges as a series of zero and one in a binary code. The information in the credit card is transferred to the computer, which changes the binary code into digits.

Use
Once the credit card processing machine reads the data in a card, it transfers the information to the cardholder’s bank through a telephone line. The bank then confirms whether there is enough cash for the transaction or not. This is when you will know if your credit card is accepted or not

Drawbacks
A credit card processing machine is part of a central processing unit and can be hacked into or be affected by malicious applications and spyware. This may result in fraud and identity theft. Unscrupulous sales clerks can also use cardholder’s data to commit crimes.

Price
The standard price of a credit card processing machine is approximately $350 including a printer. However, Installation fees are not included in this quotation. A printer is an essential component of the credit card processing machine because it enables users to get receipts with details of their transactions.

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