Whether you pay your credit card processor one lump sum at the end of the month or have a little amount deducted from your daily batch of transactions, you are paying for the services of your credit card processor. But what exactly are you paying for?
While you might think that a credit card transaction involves just you and your customer, there are five parties involved in every card transaction. These include the card-issuing banks, such as Wells Fargo or Capital One, the actual cardholder presenting payment, the merchant accepting payment (you), your credit card processor, and the merchant bank. While you might recognize four of these parties, you might not recognize the “merchant bank” – also known as the “acquiring bank”.
The acquiring bank opens a merchant account for your business, which gives you the ability to accept both credit and debit cards for payment. The acquiring bank provides the funds for transactions on behalf of the card-issuing bank such as Wells Fargo. In other words, the acquiring bank pays the merchant and then goes to the bank that issued the card to collect their money. Your credit card processor acts as a traffic cop between all the parties, documenting all transactions along the way
Behind the Scenes Magic
You are certainly familiar with using credit cards as a consumer. You know when you present your card for payment that a merchant will get paid and you will pay later when your statement arrives. As a business owner, it can help to know a bit more about the hidden logistics of credit card and debit card payments.
Let’s explore what happens behind the scenes from the moment a customer pays with a credit or debit card to the moment you see funds appear in your bank account:
When you accept a credit card for services, there are three steps that take place. While the steps may vary slightly based upon the type of card you accept, the steps involved all begin with “capturing” the credit card information. This begins the Authorization process. This can be done manually, through your funeral home’s website if you have a shopping cart or payment page on your website or it can be done with a terminal that has a chip or stripe reader.
The card data, along with your business information and the information about the specific transaction is sent to an Acquiring Bank such as First Data. The Acquiring Bank sends the information to the card brand (Visa, MasterCard etc.) who then checks with the specific Card Issuing Bank (Wells Fargo, Capital One, etc.) to see if there is enough available credit on the cardholder’s account.
Assuming the funds are available, the Card Issuing Bank holds the funds required for your business. The Card Issuer sends back a status of approved, declined or error to the Acquirer (First Data), who then reports back to your business, all within a few seconds. This completes the first step of three.
At the end of each business day, you close your transactions for the day by sending a “batch submission”. This likely happens automatically each day. This second step is called, “Clearing” as all of your approved transactions are submitted for payment. Once you have received authorization, the funds that you requested are held on the line of credit and the cardholder’s available credit line is reduced to guarantee your funds.
In the third step, the Acquiring Bank deposits the total batch amount as a “batch settlement” into your bank account. The Acquiring Bank then sends a request to the card brand for reimbursement of the funds they advanced to you. The card brand sends a request to the Card Issuing Banks for all of your transactions. This could include many banks such as Chase, Capital One, Bank of America etc.. The Card Issuing Banks then pay the money back to the Acquiring Bank and add the amount due to the cardholder’s monthly statement. During this process, the fees that a business pays to process the transaction are collected by all the parties involved.
The Card Issuer receives the majority of the fees, called an Interchange Rate. Interchange rates are a schedule of fees set by the card brands (Visa, MasterCard, etc.) that determine the price of a credit card transaction. Although the card brands set interchange rates, the money itself is paid to the card-issuing bank. Interchange fees cover the cost of service, along with the associated risks, like fraud risk and credit risk.
There are literally hundreds of interchange fee levels that go into determining the rate at which your transaction will be processed. Interchange fees make up the bulk of what you pay in credit card processing fees, and they’re the same for all merchants. Depending on your pricing structure, interchange fees might be passed through to you directly or they might be bundled into a simplified rate.
The Acquirer also collects a fee that is split between the Acquirer and your credit card processor. Some fees are mandated by the Card Brands that make up the remainder of your total processing fees. Your processor makes sure that all of this gets handled and documented.
Where Your Processer Fits In
A credit card processor, such as Chosen Payments, a uniform industry processor, serves as a link between your business and the Acquirer and is registered with the Card Brands to legally provide merchant services. Your processor has access to specific card and transaction information to assist you in managing your merchant account. As you can imagine, this requires a great deal of security and trust from Visa, MasterCard, and others.
The registration process is a very thorough, rigid and expensive endeavor and many companies are turned down by the Card Brands. Your processor should provide a dedicated account manager that understands your uniform-related business and your unique operations such as what type of software you use for running your business. These are the services you are paying for each month through the fees you are charged.