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With 160 million US credit and debit card holders, payment processing is essential to any business hoping for success in the modern age. Unfortunately, many of us use our cards for everyday purchases without realizing the complexity of the payment processing system. What happens after you tap, swipe, or insert a card? In those few seconds, what steps occur at your point of sale (POS) between a swipe and an approved purchase? As a business owner, it’s essential to understand the fundamentals of payment processing to stay competitive in today’s market and to arm yourself with knowledge when shopping for a processor.
We are dedicated to providing transparency in an industry that often leverages confusion to increase merchant costs. That’s why we’ve broken down the complexities of payment processing to keep you informed. So let’s break it down!
What is payment processing, and why should I care?
Payment processing is a cycle of computer operations that authorize and process card transactions on behalf of the merchant. It begins when a customer presents a credit or debit card and ends when the funds are deposited in the merchant’s bank account. But who exactly are these middlemen? Let’s read on.
- Acquirer – The acquiring bank is the merchant’s bank for processing credit and debit transactions. Acquiring bank examples include Wells Fargo, Westamercia, and Esquire. Some acquiring banks are also payment processors.
- Issuer – The issuing bank is the customer’s bank. The Issuer is the financial institution that issued the credit card involved in the transaction. It receives the payment authorization request from the credit card network, where the Issuer either approves or declines the request for funds.
- Payment Processor – The payment processor provides services or devices allowing merchants to accept credit cards, facilitates funds transfer and ensures merchants receive timely payments. They first authorize the transaction by checking against fraud and the credit limit of the customer’s card. After approval, the processor works with card brands such as Visa, MasterCard, American Express, and Discover to settle the transaction and then with the acquiring bank to deposit funds into the merchant’s account. We, KokuaPay, play this role in the credit card transaction process as a front and back-end processor. and send payment details to the credit card network. It then forwards the payment authorization back to the acquiring bank. A payment processor can help recommend solutions that work best for businesses and is broken down into two subcategories; front and back-end payment processing. KokuaPay is both a registered front-end processor and a back-end processor with EPX.
- Front-End Processor: Authorizes and routes transactions and forwards data to the back-end processor at the batch close.
- Back-End Processor: Routes transactions, validate authenticity, and sends settlement files to the acquiring bank.
- Card Networks – The credit card networks, or card associations, sit at the center of the payment industry and include Visa, MasterCard, American Express, and Discover. These companies provide electronic networks that allow consumers, merchants, processors, and banks to communicate and process transactions. They also set the interchange rates charged by issuing banks and arbitrate chargeback disputes.
- Merchant – Any merchant that uses electronic payment services. This can be retail store owners, restaurant owners, service-based merchants, internet or e-commerce business, MOTO, non-profits, or other merchant types. Merchants are KokuaPay’s immediate clients.
Understanding payment processing is essential for the financial health of your business, as well as customer satisfaction. Prioritizing secure payment processing that’s easy to use builds customer loyalty, ultimately growing your business. Furthermore, offering different types of payment options and managing fees can increase your sales in the long run. Let’s explore the most common payment options.
What are the Different Types of Payment Processing?
Merchants have several options when it comes to payment processing methods. Here are some common types:
- Credit Card Processing – This is the most widely used payment processing method. It involves accepting credit card payments from customers. The merchant sets up a merchant account with a payment processor or acquiring bank to process credit card transactions.
- Debit Card Processing – Similar to credit card processing, this method accepts payments from customers’ debit cards. Debit card transactions are typically processed through the same networks as credit cards.
- E-Wallets – E-wallets, such as PayPal, Google Pay, or Apple Pay, allow customers to store their payment information digitally and make payments through their accounts. Merchants can integrate e-wallet options into their payment systems to offer convenient payment options to customers.
- ACH Processing – Automated Clearing House (ACH) processing enables electronic bank-to-bank transfers. It is commonly used for recurring payments, direct deposits, and business-to-business transactions. Merchants can accept payments directly from customers’ bank accounts.
- Mobile Payment Processing – With the increasing popularity of smartphones, mobile payment processing has become popular. Merchants can use mobile payment apps or mobile card readers to accept payments using smartphones or tablets.
- Cryptocurrency Processing – Some merchants are starting to accept cryptocurrencies like Bitcoin as a form of payment. Cryptocurrency payment processors facilitate the acceptance and conversion of digital currencies into traditional currencies.
- Point-of-Sale (POS) Systems – POS systems combine hardware and software to process payments at physical retail locations. These systems can accept various payment methods, including credit cards, debit cards, and cash.
- Online Payment Gateways – Online payment gateways enable merchants to accept payments through their websites. Customers enter their payment information, which is securely transmitted for processing. Payment gateways support various payment methods, including credit cards, debit cards, and alternative payment options.
These are just a few examples of payment processing methods available to merchants. KokuaPay specializes in electronic payment processing with E-Wallets, ACH, Mobile Payments, POS systems, and Online Payment Gateways. The choice of method depends on factors such as the nature of the business, customer preferences, and the desired level of convenience and security.
What are the Real Costs of Payment Processing?
Payment processing fees for credit cards can vary depending on several factors, including the payment processor, the type of merchant account, the volume of transactions, and the specific terms of the agreement. Here are some common types of fees that merchants may encounter:
- Interchange Fees – Interchange fees are set by the credit card networks (Visa, Mastercard, etc.) and are typically the largest component of credit card processing fees. These fees are paid to the card-issuing banks and are a percentage of the transaction amount plus a fixed per-transaction fee. Interchange fees can vary based on factors such as the type of card used (debit, credit, rewards, etc.) and the nature of the transaction (card-present, card-not-present) and are adjusted twice yearly in April and October. Since interchange is public knowledge, you can review all the interchange categories and their rates from any card association website.
- Assessment Fees – Credit card networks charge assessment fees, typically a small percentage of the transaction amount. These fees contribute to the operational costs of the network and support various services and security measures. For example, a Visa credit card assessment may be 0.14% of the credit card volume and $0.0195 per transaction. For a $100.00 transaction, this would be about $0.16. Side note, Assessments help to pay for advertising, so when you watch those Superbowl ads and hear the word “priceless,” you’ll always associate it with Mastercard.
- Payment Processor Markup – Payment processors charge a markup fee for their services. This fee covers the cost of processing transactions, providing customer support, maintaining infrastructure, and offering additional features or services. The markup fee can be a percentage of the transaction amount, a flat fee per transaction, or a combination of both.
- Monthly or Annual Fees – Some payment processors may charge a monthly or annual fee to maintain a merchant account or access certain features or services. These fees can vary depending on the provider and the level of service required.
- Gateway Fees – There may be associated gateway fees if merchants use an online payment gateway to process transactions. These fees cover the cost of integrating the gateway into the merchant’s website or system and facilitating secure transaction processing.
- Chargeback Fees – If a chargeback (a disputed or fraudulent transaction) occurs, merchants may incur chargeback fees. These fees cover the administrative costs of resolving the dispute and can vary depending on the payment processor.
It’s important for merchants to carefully review the terms and fee structure provided by payment processors and acquiring banks to understand the specific costs associated with processing credit card payments. Pricing should be transparent and easily understood! Pricing structures can vary, so comparing options and negotiating rates may help merchants find the most competitive and suitable payment processing solution for their business.Not sure if your current processor is meeting your business needs? Check out our latest article:
What is Compliance and Why Does it Matter?
Payment processing compliance refers to industry regulations, standards, and guidelines governing the handling, processing, and storage of sensitive payment data. It encompasses various aspects, including data security, privacy, fraud prevention, and legal requirements. Payment processing compliance matters for several reasons.
Firstly, it helps protect customers’ payment information and maintain their trust. Compliance measures, such as PCI DSS (Payment Card Industry Data Security Standard) compliance, ensure the implementation of robust security practices to safeguard sensitive data from unauthorized access or breaches. Secondly, compliance is crucial for merchants to avoid penalties and maintain positive relationships with payment processors. It also boosts reputation, attracts customers, and ensures security and adherence to laws and standards.
An instance of a major PCI DSS compliance breach happened in 2013 when Target had 40 million credit card numbers stolen, despite having alerts set up. Target had invested in a $1.6 million malware detection tool, but it failed to detect crucial warnings from the software for three weeks. Target had to pay nearly $18.5 million in settlements across the United States and over $202 million in legal fees as a result of the data theft. Data breaches can happen to anyone and in any industry.
Active participation by acquirers, merchant services providers, payment processors, equipment vendors, and merchants helps limit serious security concerns, including data breaches. Merchants are required to validate their PCI compliance on an annual basis, as well as perform a network scan every 90 days. Your payment processor can help by ensuring the hardware and software provided are PCI-compliant.
What about Security and Fraud?
Payment processing is a high-risk area for fraud, so choosing a processor with strong security measures is important. Security is a crucial aspect of payment processing, and processors are held to standards and regulations established by banks and credit associations. The Payment Card Industry Security Standards Council (PCI-SSC) is one such forum that monitors and validates security solutions and helps keep processors compliant and updated. Anti-fraud measures have become a priority to protect against credit card fraud, which the US accounts for almost half of worldwide.
Processors should use encryption, tokenization, and EMV technology for security measures. Encryption hides the meaning of data within a message, and tokenization replaces sensitive data with a unique identifier. The most recent security measure is the EMV chip technology, which shifted liability for fraud to business owners who do not offer it.
The Wrap Up
Accepting credit cards is fundamental to running a business, so facilitating seamless and secure transactions between merchants and customers is equally important. It directly impacts customer satisfaction, trust, and business growth.
By offering diverse payment options and adhering to compliance standards, merchants can cater to customer preferences and enhance their reputation. However, it is crucial to be aware of the associated costs, including interchange fees, payment processor markups, and other transactional charges. Understanding the basics and choosing the right payment processing solutions can help merchants optimize profitability and provide a seamless payment experience to their customers. Merchants who integrate payment processing into their operations can fully unleash the potential of their business in today’s constantly evolving digital world.
Still have lingering questions, or want us to take check your current statement? Let us know!