Merchant Processing 101

Thinking about adding
electronic processing capabilities?

There’s a lot you
should know.

are countless reasons why a business should add credit card and electronic payment
processing capabilities – transactional speed, convenience, increased customer
satisfaction, improved cash flow, views into sales data and more. But perhaps
the most important consideration is the sheer volume of consumers who use
non-cash methods as their primary form of payment.

2005, credit card and electronic transactions accounted for an overwhelming
$3.4 trillion of total U.S. payments, according to The Nilson Report. That’s 50
percent of all transactions nationwide for that year. More recently, Visa USA
estimated that nearly 60 percent of U.S. consumers aged 18 to 25 use cards as
their primary payment method.

while the reasons for adding payment processing are clear, understanding all
your options and which are right for your business is far more complex. This
article will give you the information you need to get started in setting up payment
capabilities for your business, and it will provide some of the essential
details you need to consider when selecting a provider.  

How Payment
Processing Works

form of the modern credit card has been in use since the late 19th
century, mostly as department store charge cards representing lines of credit. Things
have changed and today, the step a merchant needs to take in order to accept
credit card payments is to establish a merchant account with a bank or
third-party payment provider. Once your account is live, the transaction
process generally works as follows: 

1.      A
customer presents a credit card for payment.

2.      By
swiping the credit card through an electronic point-of-sale (POS) transaction
terminal, typically provided by the bank or payment provider, an electronic
request is submitted to the processing network for authorization.

3.      The
processing network receives your electronic request and determines if the
cardholder’s account is valid and if the funds are available. If so, a response
called an "authorization code" is transmitted, guaranteeing your
access to the funds.

 4.      A
receipt is then printed for the customer using the POS terminal or your
computer. The customer then signs the receipt and, for their part, the
transaction is complete.

 5.      At
the end of the business day, a merchant will electronically submit a final
request to the processing network to "capture the funds" for all
authorized transactions in a given day. This process is referred to as
settlement. Once approved, a response is generated to your electronic terminal
or computer.

 6.      From
there, the funds associated with the batch you settled are deposited
electronically into your business bank account, usually within 48 to 72 hours.
Typically, the rate and any fees paid to your merchant account provider are
deducted from your account at the end of the month.

At the end of the month, your merchant account
provider will send a statement to you, detailing the credit card activity for
the month and the associated fees you’ve been charged.

process describes what happens in a traditional retail, or "bricks and mortar"
sales environment. For Internet and e-commerce merchants, the set-up process
requires a few additional steps.

Terminals vs. e-Commerce Processing

they do not have access to the purchaser’s physical card, Internet and
e-commerce merchants rely on specialized software that allows them to capture
and process credit card information on their Web sites instead of through a POS
terminal. There are two basic software programs needed to enable online

Shopping Cart: A secure series of
scripts (or coding) that keep track of items a visitor chooses to buy from a
site until they proceed to checkout. On the checkout screen, the shopping cart
collects the credit card number, billing address, authorization number and
expiration date.

Payment Gateway: When the online shopper
is ready to finalize the transaction, the information collected in the shopping
cart is transferred to a payment gateway for authorization. It is the
equivalent of a physical POS terminal used in a retail setting.

situation where a purchaser’s card is not physically present happens with MOTO
or Mail Order and Telephone Order. Here, touch-tone processing or an automated
response unit (ARU) allows for credit card authorization and processing over
the telephone. This type of processing does not require a shopping cart or
payment gateway.

 Pricing Basics

Now that you know how processing works and what the
available options are, you’re probably wondering how much all this will cost.
While service fees and rates vary from provider to provider, "bundled" pricing
is the most common type of agreement used in determining which per-transaction
rate applies to which type of merchant. In the simplest terms, pricing is based
on risk: the higher the risk involved in the transaction, the higher
the rate the merchant will have to pay:

Qualified Rate applies primarily to card-present or traditional
card-swipe (not key-entered) transactions. This is the lowest possible rate a merchant will
incur when accepting a credit card. Telephone and e-commerce transactions
cannot receive the qualified rate because they are unable to swipe a customer’s

Mid-Qualified, or partially qualified rate, is the percentage a merchant will be charged if
they accept a credit card that does not qualify for the lowest rate. This may
happen if a consumer credit card is keyed into a credit card terminal, virtual
terminal (online) or via a shopping cart.  This is the best rate that a telephone or
e-commerce business can receive.

Non-Qualified is the highest percentage rate a merchant can be charged and applies to
those transactions posing the greatest amount of risk. This rate would apply if
a special kind of credit card is used like a rewards card or business card or
if address verification is not
performed, or a merchant does not settle its daily batch within the allotted

 Again, these rates are used to determine the cost
to the merchant on a per-transaction basis. There are additional costs
associated with payment processing, including start- up fees, equipment costs,
chargeback fees and more. Stay tuned for the next e-newsletter installment for
additional processing tips and useful information for merchants and business

 e-onlinedata (EOD) is the nation’s fastest-growing,
most trusted provider of online payment solutions. Thousands of Internet, mail
order, auction sellers and retail businesses – from start-ups to billion-dollar
companies – are choosing EOD every month for affordable, reliable, and
easy-to-use credit card processing and Authorize.Net payment gateway solutions.
For more information on e-onlinedata or to apply for a merchant account, please
visit  us online
. To learn more check out Merchant Processing 102.

Merchant Processing 101 is a production of e-onlinedata provided to Total
Hosting, reprinted with permission from e-onlinedata. Content is intended to
provide merchants and small business owners with practical information and
insight into the world of payment processing.


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