Credit card processing has become an essential part of modern business transactions. Whether you're a small mom-and-pop shop or a large corporation, being able to accept credit card payments from your customers is crucial for success. However, credit card processing can be complex and confusing, with various methods, fees, and regulations to navigate. In this comprehensive guide, we'll break down the ins and outs of credit card processing, providing you with a step-by-step overview of how it works, the different types of credit card processing methods available, and tips on how to choose the right one for your business.
How Credit Card Processing Works: A Step-by-Step Guide
Credit card processing involves a series of steps that occur when a customer makes a purchase using their credit card. Here's a step-by-step guide to how credit card processing works:
Step 1: Customer Initiates a Purchase
The credit card processing journey begins when a customer decides to make a purchase at a business that accepts credit card payments. The customer selects their desired items or services and proceeds to the checkout process.
Step 2: Credit Card Information is Captured
At the checkout, the customer provides their credit card information, which typically includes the card number, expiration date, and security code. This information can be entered manually, swiped, or inserted into a card reader, depending on the type of credit card processing method used.
Step 3: Transaction is Authorized
Once the credit card information is captured, it is sent to the credit card processor for authorization. The processor verifies the card details, checks for available funds, and confirms if the transaction is legitimate. This process usually takes a few seconds to complete.
Step 4: Authorization Response is Received
The credit card processor sends an authorization response to the merchant, indicating whether the transaction was approved or declined. If approved, the merchant can proceed with completing the sale. If declined, the merchant may need to request an alternative form of payment from the customer.
Step 5: Settlement and Funding
After the transaction is authorized, the merchant "settles" the transaction, which means they finalize the sale and prepare for the funds to be transferred to their account. Settlement typically occurs at the end of the business day or on a predetermined schedule, depending on the credit card processing provider.
Step 6: Funds are Deposited
Once the settlement is complete, the funds from the credit card transaction are deposited into the merchant's designated bank account, minus any fees associated with credit card processing.
Types of Credit Card Processing Methods: Traditional, Mobile, and Online
There are three main types of credit card processing methods: traditional, mobile, and online. Let's take a closer look at each one.
Traditional Credit Card Processing
Traditional credit card processing, also known as "brick-and-mortar" processing, is the most common method used by businesses with a physical location where customers can make purchases in person. This method involves a point-of-sale (POS) system, which is a combination of hardware and software that allows merchants to accept credit card payments.
The hardware component of a traditional POS system typically includes a cash register or a dedicated terminal, a card reader (such as a magnetic stripe reader or an EMV chip card reader), and a receipt printer. The software component includes the merchant's accounting system, inventory management, and a payment gateway, which is a service that securely transmits credit card information to the credit card processor for authorization.
To process a credit card transaction using a traditional POS system, the merchant captures the customer's credit card information using the card reader. The information is then sent to the payment gateway for authorization. Once the transaction is authorized, the merchant completes the sale, and the funds are settled and deposited into their designated bank account.
Traditional credit card processing usually requires a merchant account, which is a type of bank account that allows businesses to accept credit card payments. Merchants are typically charged fees for each transaction, which can include a percentage of the transaction amount, a flat fee per transaction, and other miscellaneous fees.
Mobile Credit Card Processing
Mobile credit card processing has gained popularity in recent years, especially among small businesses, vendors at events or markets, and service-based businesses that operate on-the-go. This method involves using a mobile device, such as a smartphone or a tablet, with a card reader attached or integrated to accept credit card payments.
Mobile credit card processing typically requires a mobile app and a card reader that can be plugged into the audio jack or connected wirelessly to the mobile device. The app acts as the payment gateway, securely transmitting credit card information to the credit card processor for authorization. Once the transaction is authorized, the merchant can complete the sale and the funds are settled and deposited into their designated bank account.
Mobile credit card processing offers flexibility and convenience, as it allows businesses to accept credit card payments anywhere, anytime. However, it may have slightly higher transaction fees compared to traditional credit card processing, and the processing capabilities may be limited by the mobile device's specifications and internet connection.
Online Credit Card Processing
Online credit card processing, also known as "e-commerce" or "card-not-present" processing, is used by businesses that operate primarily online or accept credit card payments through their website. This method involves a payment gateway that securely collects and transmits credit card information from the customer's computer or mobile device to the credit card processor for authorization.
To process a credit card transaction online, the customer enters their credit card information on the website's checkout page. The payment gateway encrypts the information to protect it from unauthorized access and sends it to the credit card processor for authorization. Once the transaction is authorized, the customer receives a confirmation, and the funds are settled and deposited into the merchant's designated bank account.
Online credit card processing may require additional security measures, such as implementing fraud detection tools, to protect against potential online fraud. Merchants may also need to comply with industry standards, such as the Payment Card Industry Data Security Standard (PCI DSS), which sets requirements for securely handling credit card information.
