A credit card is metallic or plastic rectangular card that a financial company or a bank issues to their customer. This card allows an individual to borrow funds from the bank and pay for desired purpose (goods or services) to traders accepting payment by card.[i]
Credit card processing is the process of payment with credit card either online or by phone or email and the series of steps involved in it.
Entities involved in credit card processing
As to who is involved in the processing of credit card, stated below are the entities who act to capture payments securely at the point of sale.
Consumer – the person that holds the credit card for making a purchase
Trader – the seller of a service or product that is purchased by the consumer
Payment gateway – this is the technology that associates a payment processor to the trader. This gateway helps in the integration of in-store purchases and online payment thus capturing the payment details for transactions and sending a message of “approved” or “declined” to trader.
Credit card processor – also sometimes referred to as payment processors facilitate in communication between consumer’s bank, trader, and the credit card network. They are responsible for the maintenance of compliance with Payment Card Industry Data Security Standards.
Card network or credit card provider – also known as the credit card brand, is the brand of credit card e.g. Visa, Mastercard, or American Express etc. These networks set standards for PCI DSS.
Issuing bank – this is bank of the cardholder or consumer. These banks determine if consumer’s account has enough funds to complete any transaction.
Acquiring bank or trader bank – in this bank the trader to hold his receives and holds his funds. These banks also may serve as card processors.[ii]
Credit card processing
Three distinct processes are involved in a credit card processing:
The authorization process involves following steps:
- The first step in this process is that the consumer provides his credit card to the trader when he purchases something. This purchase could be through in-app or mobile payment.
- After this the request is transferred to the processors of the payment by the trader for payment approval.
- Transaction is submitted by the processors of the money to the card corporation and after that it reaches the bank.
- Authorization requests including parameters like expiry date are made to the bank which then either accepts or denies the transaction on the basis of presence or absence of sufficient funds.
- The acceptance or no acceptance is then sent to the association, bank and trader.
Settling and Provision of Funds
Following steps are involved in the settling and funding:
- Approved transactions are transferred to the entities who process the payment by the traders.
- These information about transactions is then transferred to the card corporationswhich in turn communicate the debits with banks who issued the card.
- The transaction amount is charged to the consumer’s account by the bank.
- Appropriate funds are then transferred to trader bank for transactions, except the interchange fees.
- Lastly, trader bankdeposits these funds in trader’s account.[iii]
Cost of credit card processing
A processing fee is usually charged for every payment done by credit card. The amount of processing depends upon the pricing model used by the processor.
There are two kinds of transaction fees:
- Wholesale fees – also called interchange fees are usually charged by card network and issuing bank. These fees cannot be negotiated.
- Markup fees – these fees are charged by the processor of the credit card and the payment gateway. These fees can be negotiated.
There are three different types of credit card processing fees which are stated below:
Interchange Fee – this is the standard fee that involves the costs of bad debt, fraud risks, payment approved and transaction processing. It is a percent purchase total including a set transaction fee determined by card network. An average interchange rate is around 1.8 % in the U.S.
Service Fee – a non-negotiable amount charged by card network. This fee is usually not very high and depends on transaction volume and your calculated risk level.
Processing Fee – the payment processing markup is the fee charged by the payment handler and depends on the processor’s pricing plan.
Various pricing models used by the payment handler include:
Flat rate – the processor sets up a fixed rate for all transactions by a credit card regardless of the purpose the card has been used for.
Subscription – the processor sets up a fixed amount of money to be charged per month and only charges a small sum of money per credit card transaction.
Tiered – this fee is dependent on the type of card you own, overall transaction volume, and risk related to the transaction. This pricing model is complex and can confuse the traders.
Interchange Plus – the most common, transparent and cost effective model. A percentage charge of transaction and a fixed amount per-transaction is charged to the trader. This clearly distinguishes markup and wholesale fee.
Advantages of credit card
With a credit card you don’t need to worry about having cash on hand. However you need to be aware of the balance you hold in your account before making a transaction so that you have enough balance to purchase a good or service.
A credit card in easier to handle and carry as it is portable and lightweight as compared to cash.
You get a monthly statement on your credit card which helps to keep a track or your total spending. However some of the credit card companies send a summary at the end of the year which can be helpful in case of taxation.
You can make purchases even you are low on money as a loan can be acquired by the credit card holders which is not the case for debit card holders. You can easily payoff this loan after you get your paycheck however you have to make sure to pay before the due date.