No matter what side of a credit card transaction you are on, it’s likely you have a basic understanding of the process. The card is run, it’s either approved or declined, and a day or so later the customer has a new charge on his card history, and the business receives the funds.
On the surface, merchant credit card processing is that simple. But peel back the layers and it gets more complex. To provide a deeper understanding of the entire process as well as elements that can impact it, we’ve outlined three things to know to better understand merchant credit card processing.
Depending on the setup you opt for, your business’s merchant credit card processing could involve four or more parties. If you opt for a quick solution, such as Square or PayPal, you’ll be dealing with fewer parties because Payment Facilitators have a unique offering compared to Merchant Service Providers.
Although the saying goes less is more, with a Payment Facilitator that isn’t always the case. Selecting the right provider boils down to your business size and needs. Opting for a traditional Merchant Service Provider means more parties are involved, but most of them are behind the scenes and never interact with business owners. Your Merchant Service Provider would act as your processing liaison and can help streamline certain parties if it can offer all-in-one services.
Just like how a consumer has to apply for a credit card, businesses have to apply for a merchant account. Why? A true merchant account is essentially a line of credit that enables a business to process credit and debit card transactions. This application process is referred to as underwriting in the payment industry.
During the underwriting process, the business’s basic information, processing volume estimates, business history and policy information is taken into consideration. If the business already accepts credit cards, merchant credit card processing history is taken into consideration as well. This information is pertinent when it comes to chargebacks.
As we mentioned, Merchant Service Providers act as processing liaisons between businesses and other parties involved. If a customer reports a chargeback, the card-issuing bank will refund the money right away. The Merchant Service Provider communicates this information to the business and, if the business cannot afford to cover the chargeback, the provider fronts that money. This is why an application process is required for merchant credit card processing.
But before applying, you need to consider the deepest layer.
Unfortunately, there are unethical providers in the payment industry that take advantage of the complexity of merchant credit card processing and hurt businesses. These types of providers have a few unethical practices: leaving out pricing options, charging unethical fees and locking businesses into contracts. That’s why it is so important to research your options incessantly before applying.
Your business is entitled to fair pricing, so you should understand all available options. True Merchant Service Providers can offer Tiered or Interchange-plus pricing, whereas Payment Facilitators can only offer Flat pricing.
Be wary of unethical billing practices, which are a bit harder to detect before applying, as you won’t know you’re being charged any of these fees until your first merchant statement. Familiarize yourself with the unethical fees we’ve identified.
Lastly, make sure you aren’t getting locked into a long-term contract with an auto-renew clause. Overlooking terms like these can cost your business more money in the long run if you find out the provider isn’t the best for you.
Now that we’ve exposed the layers of merchant credit card processing, you’re ready to start assessing solutions. Consider the features, equipment and customer support your business would gain with the providers you consider.
Were you surprised by any of the merchant credit card processing information provided? Tell us more in the comment section below.
Editor's Note: This post was originally published in July 2018 and has been updated for comprehensiveness and accuracy.