The sleek, shiny plastic in our hands that represents a card is very often synonymous with convenience and everyday life. It comes as no surprise that the American credit card sector is crucial to the expansion of the economy in the country. In fact, cardholders’ purchases, restaurant dishes, and online sales bring in millions of dollars every day.
Most of us have been in this situation: You’re out shopping for that upcoming beach trip to Florida or doing your weekly grocery shopping, and you forget your wallet. Frank McNamara made this relatable mistake when he accidently left his wallet at home while out dining. The original Diners Club Card, which is widely recognized as the invention of the contemporary charge card, was introduced by him and his business partner Ralph Schneider in 1950 after McNamara was inspired by his own personal experience.
The market size of the card-issuing sector is $164.3 billion, according to IBIS World. This is anticipated to increase by 3.4 in 2022. Every retailer collaborates with a merchant services provider (MSP) to execute credit card transactions. This entity assists the retailer during the transaction processing process and facilitates it.
There are two slightly distinct definitions for this phrase. It first refers to the proprietor’s capacity to accept safe card transactions. The phrase also refers to the tools and services needed to complete a transaction. Payment options include in-person, online, over an eCommerce platform, and via mobile devices.
The Elements of Credit Card Processing
Several factors are involved in a standard processing (or payment processing) transaction. The transaction could happen at a physical location, online, or through a mobile app. No matter the POS platform, these factors work together to efficiently complete customers’ transactions
Acquiring Bank: This entity, often known as the merchant bank, is in charge of holding the sales transaction proceeds. The retailer is also given a card reader and other tools by the acquiring bank to conduct transactions.
Cardholder: A customer makes a purchase using an EMV-enabled Visa, Mastercard, American Express, or Discover card or gift card. Digital wallets like Apple Pay and contactless payments are also becoming more and more popular.
Credit Card Network: The card brand or card association is another name for this entity. The interchange fee and payment card industry data security standard were set by the four major networks (or PCI DSS). Retailers must adhere to PCI compliance requirements created to safeguard sensitive customer data.
Issuing Bank: This financial institution, also known to as the issuer or cardholder’s bank, delivers the customer their card. The issuing bank decides if the cardholder has enough credit available for transactions.
Payment Gateway: A channel for electronic payments connecting the retailer and their payment procedure. It is necessary to finish a credit card or debit card transaction online.
Payment Processor: It makes it possible for the cardholder’s bank, the retailer, and the card network to communicate electronically.
Retailer: The owner of this small business offers the goods or services that customers are seeking. Purchases can be made in-person, online, or through a mobile device.
Credit Card Processing: Who is Involved?
Cardholder: The customer
Retailer: The store/seller/vendor
Retailer Bank: The acquiring bank
Payment Processor: The business accepting the card payment
Independent Sales Organizations (ISOs) and Membership Service Providers (MSPs): Third parties to whom payment processing is delegated
Issuing Bank: Issuer of the card, customer’s bank
Card Associations: card networks (Visa, Mastercard, Amex, Discover)
The Procedure of Processing Payments
A number of meticulously planned measures go into each card transaction. Unless there are technical issues, each purchase only requires a few seconds to complete.
- The customer uses a card at the retailer’s payment reader by swiping, dipping, or tapping it. In a card-present transaction, the retailer’s in-store POS system handles this. Online and mobile transactions including a card are referred to as card-not-present transactions.
- The transaction information is gathered by the payment reader and sent to the retailer’s payment processor.
- The processor notifies the card network of the transactional information.
- The card network notifies the issuing bank with the payment information. The issuing bank decides whether to approve or reject the transaction based on that. Through the payment reader, the issuing bank communicates its choice to the processor
- If a transaction is authorized, the issuing bank transfers the sales money to the business’s retailer account. The retailer account, which serves as a money storage facility for each retailer’s sales revenues, is maintained by the acquiring bank.
- The transaction is resolved after a predetermined amount of time (typically two to three business days). The retailer account sends the sales profits (less the processing costs) to the business owner’s bank account.
What Services and Products Do MSPs Provide?
An MSP acts as a link between retailers and the banks handling card transactions. Businesses of the following categories could serve as MSPs:
- Bank (or other financial institution)
- Electronic payment gateway provider
- Independent sales organization (or ISO)
To assist retailers in meeting their card processing demands, they provide a variety of products and processing services. MSPs now regularly provide loyalty programs and gift cards.
Some of their most recognized goods and services include:
- Card Reader: A little device that allows processing of cards using a tablet or mobile phone
- Card Terminal: A little device for accepting card-present payments
- Customer Support
- eCommerce Platform Software: necessary for running an online store
- Electronic Payment Gateway: Crucial for accepting payments for eCommerce
- Point of Sale (POS) System: Technology that provides other services in addition to accepting payments on-site.
The Best MSP for Your Small Business: How to Choose One
A decision about an MSP shouldn’t be made impulsively. Business owners should consider a variety of factors when choosing a provider while evaluating prospects. Retailers should select a service that best fits their company as a whole. Let’s look at some of the factors you should consider while selecting a provider.
Payment Methods Accepted
An innovative MSP provides a wide range of payment choices. Both debit and credit card transactions should be processed by retailers. The next step is for business owners to be able to accept digital wallet and contactless payments. Additionally, customers should be able to pay with PayPal, ACH, and conventional checks.
Equipment for Processing Payments
Retailers should evaluate the equipment selections of each provider in light of their operational requirements. Determining if the company sells the hardware or offers it as part of a promotional package is something else business owners should look into. To make the retailer’s hardware work with the provider’s system, the company will ideally modify the retailer’s current hardware. It is strongly advised against leasing equipment because it is more expensive than buying it altogether.
Easy to Use
Even beginner users should be able to process payments using a POS system or card reader with very basic instructions. The MSP should also keep a collection of instructional videos and/or other resources.
Security for Transactions and Defense Against Fraud
Business owners ought to pick an MSP that complies with PCI. The provider should supply POS systems that support more secure EMV (or chip) cards for card-present transactions. Card payments made using EMV technology use encrypted data, which limits scammers’ access to the transactions. Last but not least, the provider needs to put in place safeguards against fraudulent card transactions.
Extended service agreements are frequently negotiated between retailers and payment processing service providers. The industry standard is a three-year contract. Retailers who terminate the contract early are subject to steep early termination fees. Some service providers now give retailers a month-to-month contract in response to unfavorable retailer feedback.
MSPs generally provide one of four fundamental models. The pricing structure that best suits a company’s transaction volume and overall demands should be chosen by the owner.
4 Frequently-Used Pricing Models for Credit Card Processing
Many small businesses like the transparent interchange-price pricing concept. Each transaction value in this case is divided between the interchange rate for the card network and the markup fee for the processor.
Regardless of the customer’s card type, the retailer receives a flat rate under this pricing structure. This simple price structure could not, however, provide the lowest transaction processing costs.
Transactions are divided into qualified, mid-qualified, and non-qualified categories by the tiered price structure. The downgrading of transactions to expensive tiers can be brought about by a number of ambiguous variables. Retailers should avoid using tiered pricing structures.
The retailer is given a monthly membership fee under this subscription pricing model, but transaction fees are lower.
Retailers are frequently charged a variety of other account service fees by MSPs in addition to transaction costs. Common service charges for payments include:
- Account setup fee
- Batch processing fee
- Chargeback fee (for disputed transactions)
- Early termination fee (for contract cancellations)
- Equipment leasing fee
- Monthly minimum fee
- Payment gateway fee
- PCI compliance fee
- PCI non-compliance fee
- Statement fee
A trustworthy MSP should provide skilled tech support and customer service. The provider ought to offer phone, email, and chat support available around-the-clock. Some service companies might advertise excellent customer support while contracting out work to less knowledgeable workers during non-business hours.
Integrations of Software
If an MSP’s program connects with the retailer’s business operations software, retailers should take this into account. Accounting, business banking, financial services, and customer relationship management (CRM) systems are examples of common software programs. The supplier should ideally allow integration with well-known third-party programs as well.
Scalability of Business
Many business owners intend to steadily expand their operations. Businesses might expand their line of goods or services, explore new markets, or do both. In any scenario, the MSP need to be able to handle that increase without experiencing any operational problems.
Choosing the Best Merchant Services Provider
The objectives, operational needs, and financial concerns of each small business owner result in unique card processing requirements. Your mission-critical hardware, such as servers and workstations, are protected by our MSP services at FTx, ensuring the best uptime possible. We closely monitor the state of your IT while regularly monitoring the health of your business. If your computer gets a virus or your hard drive is about to crash, our technology alerts us before you notice a problem. FTx MSP ensures that your business is free of issues with everything from our backup and disaster recovery (BDR) solution and network failover to our FTx Lifeline technical support services. Got any further questions or concerns? Give us a call today and one of our specialists will be available to help you out!