One of the things you have to figure out when you’re starting a business is how to accept payments from customers.
Most people prefer to pay with credit cards, which means that you have to have credit card processing equipment.
Read on to learn how merchant processing works, and how you can find the best equipment for your business.
How Does Credit Card Processing Work?
When you decide to accept credit cards and other forms of payments, such as ACH and eChecks, you need to have a merchant processing account. The main reason why you need to have credit card processing equipment is security.
Each credit card transaction goes through 7 steps in a matter of seconds. Hackers or other thieves could be looking at these various steps, trying to get your customers’ credit card information. That can lead to fraud and ID theft.
The equipment is specialized for both online and offline purchases. The secure connection ensures that your customers’ information is protected at each step of the journey.
What Happens During a Credit Card Transaction?
Whether your credit card processing equipment is set up for online of offline transactions, each credit card transaction goes through the same process. It’s hard to believe that all of this happens so quickly.
1. Customer Wants to Buy a Product or Service
This step is pretty simple. You convinced a customer to do business with you. They give you a credit card or enter their number online. Their card is associated with a bank, such as Wells Fargo, a local credit union, or Capital One.
Throughout this process, your customer is called the cardholder. You are the merchant because you’re selling the goods or services.
2. You Accept the Payment
This is another simple step. You have a merchant account, which accepts the payment.
3. Your Bank Routes the Transaction
As a merchant, your bank starts to route the transaction through the appropriate card association’s network to the customer’s bank.
Here’s what you need to know about this part. Your bank is called the acquiring bank because it will acquire the funds from the customer’s bank account. Card associations are commonly known as Mastercard, Diners’ Club, American Express, Discover, and Visa.
Your bank is registered with one or more of these networks, which allows you to accept Visa or MasterCard payments. It also explains why some businesses will accept Visa, but not American Express.
4. Customer’s Bank Approves Transaction
Assuming that your customer has enough funds in their account and provided the correct card info, the transaction will be approved by the customer’s bank.
5. Routed Back to Acquiring Bank
Once your customer’s bank approves the transaction, the information will go through your card association bank to your bank.
6. Notification of Approval
Your transaction will be approved, and the credit card processing equipment will print the approval and receipt for the customer.
7. End of Day Settlement
At the end of each day, you need to settle the transactions. It’s a way to reconcile your transactions, sent them to your bank, and get paid.
Of course, credit card transactions don’t happen for free. There’s a price to the convenience of accepting credit cards.
During settlement, your merchant processor will assign a level to the transaction. This will determine the percentage of the transaction that goes to your bank and card association. Read more here about the levels and how they work here.
Your bank will determine the fees, and either withhold them from your deposit or deposit the funds in full and bill you at the end of each month.
How to Get Credit Card Processing Equipment
Now that you know how credit card processing works, how can you get the equipment you need to process credit cards?
Start with Your Industry
Not every industry is approved to have merchant accounts. There are some that are considered high risk because of chargebacks and fraud. These include online casinos, dating sites, travel businesses, and furniture stores.
If your business falls into one of these categories, it doesn’t mean that you can’t get a merchant processing account. You will have to jump through more hoops to get one, though.
Compare Rates of Different Processors
You’ll find that there are a lot of options to set up a merchant account.
Some of them like PayPal or Square are popular options for small businesses. They offer an easy way to accept payments online. Square is popular with small retail shops like coffee shops. All you need is an iPad and an account with Square to accept payments.
These are simple accounts to start, but you need to consider the rates that you’re charged. Some of them will charge as much as 30 cents plus a percentage per transaction.
If your business relies on volume and you have a very small profit margin, this can eat into your profitability.
Compare the Entire Cost of Payment Processing Equipment
As you’re evaluating costs you need to take into account the annual fees, equipment rental fees, and the total cost to have credit card processing equipment.
You’ll want to add these fees in addition to the fees per transaction to determine the best rate for you.
Ask About Rate Flexibility
If you’re a newer business, you are doing to be seen as a higher-risk business. You may get approved for an account, but you will pay a higher rate.
Ask the merchant account providers if there’s flexibility in your rates. If you show a solid financial track record over the first 6-9 months, will you be eligible for a lower rate?
That’s an important question that can save you a lot of money in the long run.
Accept Credit Card Payments
You need to cater to your customers. That means that you need to accept credit card payments. Credit card transactions are very complex, but credit card processing equipment ensures that each transaction is quick and secure.
You should shop around to find the best merchant processor that fits your business needs at the best cost.
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