Consumers are so used to the convenience of credit and debit cards that it's no longer an option for a merchant to take plastic -- it's a necessity. Consumers expect to be able to use plastic to pay for everything, even small items. From their point of view, that's the end of the transaction but it's a whole different story for the merchant. From credit card readers to securing the networks to transmitting information to the bank, there are multiple steps that must happen before the money is finally deposited into the merchant's account.

1. BUSINESS.COM GUIDE TO CREDIT CARD PROCESSING

2. CONTENTS
OVERVIEW OF CREDIT CARD PROCESSING 3
EQUIPMENT 7
CALCULATING COSTS 8
PURCHASING TIPS 11
COMPARISON CHECKLIST 12
GLOSSARY OF TERMS 13

3. 3
OVERVIEW OF CREDIT CARD PROCESSING
WHY
There’s a television commercial for a major credit card
company that shows people zipping through a checkout
line to make purchases. Then along comes some guy
trying to pay with cash, and everything slows down,
causing the cashier considerable angst’not to mention
the customers at the back of the line.
These days, almost everybody uses plastic to pay for
even the smallest items. There was a time when you
couldn’t use a credit card to buy anything under $10.
Now, you can buy a pack of gum and put it on your
card. Consumers are so used to the convenience of
credit and debit cards that it’s no longer an option for a
merchant to take plastic-it’s a necessity.
“CONSUMERS ARE SO USED TO THE
CONVENIENCE OF CREDIT AND DEBIT CARDS THAT
IT’S NO LONGER AN OPTION FOR A MERCHANT TO
TAKE PLASTIC-IT’S A NECESSITY.”

4. 4
HOW
From the consumer’s point of view, most of what
happens after you present your card for payment is
invisible. You swipe, maybe punch in a PIN (Personal
Identification Number), or sign; and the amount of
your purchase is deducted from your bank account
(via a debit card) or added to your balance (via a
credit card). Easy.
For the merchant accepting a card, it’s a whole different
story. When the credit card is swiped, a card reader
transmits the credit card number, the amount of the
sale, and the identification number of the merchant
over a secure network to a credit card processor.
The network could belong to the bank that issued the
card or the credit card brand (e.g., Visa, MasterCard,
Discover, American Express). The processor could be
a bank, or a company that specializes in processing
credit card transactions.
The credit card information is transmitted over the
network to the bank that actually issued the card to
verify that the card is approved and that the customer’s
credit line covers the cost of the purchase. The bank
then sends an authorization back over the network to
permit the sale to proceed. The sale is now complete,
but the transaction isn’t really closed until money moves
from the buyer’s account to the seller’s account.
This is where the credit card processing company
comes in.

5. 5
At the end of each business day, a batch of all the
day’s charges are electronically transmitted through
the credit card processing company’s network. The
processing company sorts individual transactions that
are sent to the respective cardholder banks. The banks
then debit cardholder accounts and pay the merchant
the corresponding amount owed. These payments
are transmitted through the Federal Reserve Bank’s
Automated Clearing House (ACH) and received by the
processing company.
We’re not done yet! The middleman in this transaction-the
processing company-needs to get paid for its
services. The credit card processing company credits
the merchant’s account for the consumer purchases
authorized by the bank, but subtracts a fee not only for
its processing services, but for the use of the issuing
bank and credit card networks, which is called the
Interchange Fee.
And all this happens instantaneously because it’s going
through a computer network, right? Well, no, it can
actually take two business days before the merchant’s
account is credited.
There was a time when the credit card processor and
the bank were one and the same, and sometimes that’s
still the case. However, many banks no longer offer this
service, mostly out of concern over dealing with smaller
businesses that are potentially risky customers. In order
to deal with the bank, you need a merchant account.
Since banks typically won’t offer merchant accounts
directly to most small businesses, you need a credit
card processing contract. That’s why these companies
are sometimes referred to as “Merchant Services.”
SINCE BANKS TYPICALLY WON’T OFFER MERCHANT
ACCOUNTS DIRECTLY TO MOST SMALL BUSINESSES,
YOU NEED A CREDIT CARD PROCESSING CONTRACT.”

6. 6
HOW
The credit card processing company secures a
merchant account for you. The company then
processes transactions for your merchant account
using its network and, in some cases, its equipment
(i.e., the credit card reader at the point of sale).
What all this means is that if you want to offer your
customers the convenience of paying with credit and
debit cards, you must use a credit card processing
company. There are a number of factors to consider.
“IF YOU WANT TO OFFER YOUR CUSTOMERS THE
CONVENIENCE OF PAYING WITH CREDIT AND
DEBIT CARDS, YOU MUST USE A CREDIT CARD
PROCESSING COMPANY.”

7. 7
EQUIPMENT
You can’t process any transactions without hardware
that reads the card, transmits the data, receives data
back, and generates a receipt for the customer and
a record of the transaction stored in a database. You
also need the software to route and store all these
transactions. Where can you get this equipment? You
guessed it-the credit card processing company.
Can you buy equipment the credit card processing
company doesn’t use from manufacturers? Probably, in
most cases.
Do credit card processing companies accommodate
the equipment of several different manufacturers?
Yes. Does it make more sense to buy the hardware
and software from the OEM (Original Equipment
Manufacturer) and just let the credit card processing
company do its own thing? Possibly.
The equipment you’ll need includes such items as
a card reader, a pin pad, a manual card imprinter,
and possibly a cash register. If you can buy the
same equipment from the OEM that the credit card
processing company is using, there shouldn’t be any
problem. On the other hand, if the processing company
uses proprietary software, you’ll need to determine
whether it’s compatible with the hardware you have.
The more common question is whether you should buy or
lease the equipment. Leasing may be attractive as a way
to minimize initial cash outlay, but check to see whether
the lease is cancellable and whether there are any fees
to cancel. Leasing generally costs more in the long run,
but there may advantages to take into consideration.

8. 8
CALCULATING COSTS
Credit card processing companies charge a
bewildering number of fees to merchants who
use their services. Complaints about credit card
processing charges can be found all over the Internet,
leading to legislation in the United States, Canada,
and other countries requiring more transparency on
pricing by credit card processors. Following are some
of the items credit card processors charge for.
First, there’s the account setup charge to open a
merchant account, and there’s usually a monthly
account charge to maintain the account. You often
have to buy or lease equipment from the credit card
processor, and there are fees for doing so.
Then there’s a transaction fee that is a percentage
of the amount charged. This is sometimes called the
“discount rate,” which is even more confusing, since
you aren’t actually receiving a discount-you’re being
charged. Generally, discount rates for small businesses
range from 2.25% to 3% for Visa and MasterCard, and
are slightly higher for American Express and Discover.
And those are just some of the fees merchants are
charged. Let’s take a closer look.
Paying the piper. Actually, several pipers. One fee can
turn into multiple fees before you know it. For example,
the merchant pays a fee to the bank that issued the
credit card and a fee to the brand that’s on the credit
card (e.g., Visa) for the use of their network, and
another fee to the credit card processing company. The
fee the credit card processing company is charging
you is a combination of all those fees that are deducted
as part of an overall transaction fee. As if all those fees
aren’t bad enough, the fee your business is charged
will vary considerably based on factors such as:
“YOU OFTEN HAVE TO BUY OR LEASE EQUIPMENT
FROM THE CREDIT CARD PROCESSOR, AND THERE
ARE FEES FOR DOING SO.”

9. 9
• How long you’ve been in business.
• Percentage of telephone sales.
• Percentage of Internet sales.
• Your personal credit rating.
• Average amount of daily sales.
• Total sales per month.
If you have an established business with a high volume of
sales and a good credit rating, you can usually negotiate
a lower service fee. Often, you have to ask for it.
Paying the piper, part II. Ask for a breakdown of all the
fees you’ll be charged, because there are more than just
transaction fees. Non-transaction fees may include such
things as service fees from other third-party providers
the processor uses, statement fees, compliance fees,
and more. The brand of credit cards you accept will also
determine your fees. American Express and Discover
usually charge merchants more than MasterCard and
Visa, so some merchants refuse to accept them.
Are you qualified? Most credit card processing
companies set rates according to tiers, with three-tier
pricing being the most common. The tiers are qualified,
mid-qualified, and non-qualified. Basically, a qualified
rate is when the sale is made in person and you swipe
the customer’s actual card. This is the lowest fee. A
mid-qualified rate is charged when data from the card
is manually entered instead of a swipe. It also applies
to most phone and online sales. The non-qualified rate
is the highest and goes into effect if you don’t settle
your daily batch of transactions within 48 hours, if you
manually key in card information but fail to enter all
the required fields, or if you don’t perform address
verification for the card.
“THE BRAND OF CREDIT CARDS YOU ACCEPT WILL
ALSO DETERMINE YOUR FEES.”

10. 10
What’s your tier? What’s more confusing than a
three-tier pricing system? How about a six-tier pricing
system? Debit cards with a Personal Identification
Number (PIN) can be processed outside of the Visa
and MasterCard networks. To get that business back,
Visa and MasterCard lowered their interchange rates
for debit cards significantly below that of credit cards.
So, if you process a PIN-based debit card on a Visa
or MasterCard network, there’s a separate qualified
rate, mid-qualified rate, and non-qualified rate that is
lower than the same rates for credit cards. You need a
checklist to keep track of all these charges. We suggest
you use the one below.
Interchange. Twice a year, the major credit card
companies publish an Interchange Reimbursement
Fee Schedule. This is what the credit card company
(Visa, MasterCard, Discover, etc.) charges credit
card processors to use their cards. Your credit card
processing company deducts this charge before
crediting funds to the merchant. The exact charge
depends on the particular tier of the transaction-whether
it’s qualified or non-qualified, using a credit or debit card.
Interchange Plus. When you start talking about
applying interchange rates to tiers, and all the various
permutations that can affect both rates and tiers, it
gets pretty confusing. Interchange Plus is a more
transparent, and less costly, alternative to tiered
pricing. The merchant pays the exact fees published in
the Interchange schedule plus a flat markup. That’s it.
Up until recently, Interchange Plus was available only
to businesses with large volumes, but is now available
to businesses with lower volumes, and even new
enterprises with no volume history.
Enhanced Recover Reduced (ERR). A combination of
tiered and Interchange Plus pricing. The credit card
processing company quotes two standard tier rates
for qualified transactions (qualified debit and qualified
credit). Those transactions that fall outside of these
two rates are charged an unqualified rate plus the
difference between the fixed qualified rate and the
Interchange rate. The system supposedly reduces and
simplifies rate calculations for small businesses.

11. 11
PURCHASING TIPS
Read the fine print. Since credit card processing
plans are complicated, go over everything carefully
before you sign.
Don’t pay cancellation fees. Buried in that fine print
might be a cancellation fee running from a couple
hundred dollars to thousands of dollars. The whole
point of such fees is to keep you trapped in a long-term
contract. You can usually ask to have the cancellation
fees removed, but if you don’t look for them, you can’t
get them waived.
Interchange Plus. This may be the best pricing plan for
small businesses, as it’s the most transparent, with no tricky
fees or hidden costs associated with tiered structures.
What are the account policies? Most credit card
processing companies require you to maintain an
account with their bank; this way it’s easy for them to
transfer funds. Other considerations include whether
there are monthly account fees, whether you can access
your account online, and if there are any restrictions on
minimum balances or withdrawals.
Comparison shop. There are numerous vendors to
consider. The following checklist will help you compare
services and features.
“MOST CREDIT CARD PROCESSING COMPANIES
REQUIRE YOU TO MAINTAIN AN ACCOUNT WITH
THEIR BANK; THIS WAY IT’S EASY FOR THEM TO
TRANSFER FUNDS.”

12. 12
This checklist will help you quickly assess
the best vendor for your needs.
Accepted Cards & Discount Rates
Visa
MasterCard
Discover
American Express
Debit Cards
Other
Fees
Address Verification
Gateway
Monthly
Statement
Transaction
Compliance
Features
Account Setup Time
Accept eCheck
ProprietarySoftware
POS Card-swipe Reader
Virtual Terminal
Fraud Protection
Address Verification
Real-time Processing
SSL (Secure Socket Level)
CVV2 (3-digit)
CREDIT CARD PROCESSING CHECKLIST
My Needs Vendor 1 Vendor 2 Vendor 3

13. 13
Annual Fee: Charge to maintain a merchant’s account-sometimes
charged quarterly rather than yearly. Can
range anywhere from $79 to $399.
Authorization Fee: Charged each time a transaction
has to be approved; applied whether the transaction is
approved or not.
Batch Fee: Charge to settle and sort the day’s sales,
sent to the processor as a batch; this fee usually
increases if a batch is sent later than 24 hours.
Chargeback Fee: The bank is responsible for all
merchant transactions and, as some protection against
loss, assesses this fee when merchant transactions
are disputed and settled in favor of the customer.
A typical chargeback is $15 to $30, plus the cost
of the transaction and the amount processed. Visa
and MasterCard limit to 1% of dollar volume that
chargebacks can be assessed; above 1%, fines are
assessed to the processing bank that are ultimately
passed on to the merchant.
Customer Service Fee: A charge for maintaining the
merchant account.
GLOSSARY OF TERMS

14. 14
CVV2 (Card Verification Value): The three- or four-digit
number on the back of the card that is not embossed
on the magnetic strip. It ensures that the purchaser
actually has possession of the card.
Durbin Amendment: Legislation passed in 2011
as part of the Dodd-Frank Wall Street Reform and
Consumer Protection Act that lowered the debit card
Interexchange Fees charged by Visa and MasterCard.
Payment Card Industry Data Security Standard (PCI
DSS): Data security controls criteria to reduce credit
card fraud for any organization or business that handles
credit, debit, pre-paid, bank ATM, and POS cards.
Point-of-Sale (POS): The physical location where a
purchase transaction takes place.
SSL (Secure Socket Layer): An encryption protocol
used to protect financial information transmitted over a
computer network.
Statement Fee: Charge to generate a monthly
statement for the merchant, whether that statement is
paper or electronic.
Transaction Fee: Assessed when the merchant accepts
an authorization.
Pin Pad: The keypad on which a customer enters a PIN
number for debit card transactions, or signs for credit
card transactions. Usually includes a card reader (swipe).
“DATA SECURITY CONTROLS CRITERIA TO REDUCE
CREDIT CARD FRAUD FOR ANY ORGANIZATION OR
BUSINESS THAT HANDLES CREDIT, DEBIT, PRE-PAID,
BANK ATM, AND POS CARDS.”