Credit Card Processing: How the System Works

Establishing a merchant account for your business enterprise is the wisest financial decision you will ever make for the growth, expansion and success of your business. Once you’ve set up a merchant account, you can accept credit and debit cards payments from your clients for your products and / or services. You can also arrange to accept online and mobile banking payments for your products and / or services.

A merchant account opens up new avenues for your business; therefore, giving your business many more opportunities to flourish. But, have you ever understood how the credit card processing system works? Have you tried to perceive the complexities of the players involved in the process and the intricacies of the system?

While it is not entirely essential for you to know the inside and outside of the card processing system because your Merchant Service Provider will do the needful for you; it is good for you to acquaint yourself with the system on a general basis.

The Participants Involved in a Card Transaction

A typical credit or debit card transaction involves the following players:

• The customer

• The merchant

• The payment gateway

• The customer’s credit card issuer

• The credit card interchange

• The processor at the acquiring bank

• The merchant’s acquiring bank

The Route the Money Takes from the Customer to the Merchant

Let’s take an example to understand how the card processing system works.

Suppose that a customer walks into a clothing store and she finds a bag that catches her eye. She immediately proceeds to the payment counter and makes a payment of $100 towards her purchase with her cards.

The cashier at the merchant’s store accepts the cards and uses a card swiping machine to set the process into motion.

• The $100 amount makes its first stop at the payment gateway where the payment is first authorized with a minor deduction in the amount.

• Now, $99 travels to the appropriate processor and after a minor deduction is submitted to the card interchange as $98.5.

• Once the transaction gets a clear at the interchange, it moves on to the issuing bank with a further deduction where the issuing bank verifies the availability of funds in the customer’s credit / debit card.

If the transaction is declined, it makes its journey back to the customer from here.

• If the transaction is approved, $98 reaches the processor at the acquiring bank, just one step closer to the merchant account.

• Once authorized, $97.5 gets deposited into the merchant’s account, which is now at the merchant’s disposal.

(The figures and fees involved in card processing are based on the number of players in the process, merchant type, card type and risk factors)

In the present age, quite a number of payments are made electronically, especially with the extensive use of credit and debit cards and online funds transfer. Although typical card processing takes seven participants, the entire transaction amazing takes a maximum of five seconds for approval.

How To Get Out Of A Lease On Credit Card Equipment

A Leasing Nightmare

Leasing can be a very frustrating experience. I once called on a merchant who had 3 different leases and he wasn’t even sure what they were for. Upon examining his business checking account statement I was able to help him identify who the leases were to and what they were attached to.

It turns out he had a lease for his terminal, another separate lease for a pin pad, and a third lease of $89 a month which he’d been paying for 6 years and wasn’t even sure what it was for. This particular lease had expired after 5 years, but he was still unsuccessful getting the leasing company to stop taking money out of his checking account.

How can this be, you ask?

That’s a good question, one you’ll be able to answer by the time you’ve read all of this post.

Your Processor Is Not Your Leasing Company

Many merchants are surprised to learn that the credit card processor and the leasing company which owns the leasing contract a merchant signs are two entirely different business entities.

This means you are free to switch processors at any time (unless your card processor has you locked into one of those manipulative “Early Termination Fee” contracts I often rail against), and it will have no bearing whatsoever on your credit card terminal. Your new processor will simply download new software into your existing terminal.

Why Leases Are So Hard To Get Out Of

Something merchants don’t stop to consider when signing a merchant agreement (especially for the first time), is the lease they are signing is non-cancellable, with very few exceptions. What this means is you WILL make the payments for the full amount of the term, unless you violate the contract or negotiate your way out of it.

Why?

One reason is because the leasing company has already paid an upfront commission, which can be as high as $1,000+, to the salesperson who got you to sign a lease. So they’re definitely going to recoup what they’ve paid. But it goes beyond that.

Another reason it’s so hard is because they have a recording of your voice over the phone agreeing to the contract terms, before you can get the equipment.

I hate leases. Yes, I’d make a great upfront commission. But if I did that I’d also be forcing my merchant to pay as much as 10 x’s the value of the equipment by the time the lease expires. Forget that. I still want to be my clients friend 5 years down the road.

The Eternal Lease

Not only will you pay for the full term you agreed on for your lease, but the majority of leases will never end unless YOU STOP THEM. This is true even after the initial term of the lease has expired.

How can this be?

Simple.

The contract usually states it will remain if effect for ____ number of years, and continue beyond that until either party stops it. Often, they’ll insert a clause stating it will automatically renew itself in 1 year increments, unless the merchant stops it, in writing, at least 30 days prior to the expiration date. Meaning the contract will perpetually renew itself, until the merchant ends it..

This means that unless you have read your contract and written down when it ends you can end up being “eternally bound” to it. (What an ugly way to do business).

How To Legally Get Out Of The Lease

To end the lease you will need to know the terms and exactly what’s written in the contract. Here are 4 ways most of the leases I’ve encountered are structured to release you from further obligation – from “good” to worst.

  1. A $1.00 buyout. This means when the lease expires you can get out of it by paying $1.00 and you now own the equipment. As far as leases go this is the one that’s the most fair (other than outright owning it, which a few rare contracts allow)
  2. Fair market value This is saying that at the end of the lease term the leasing company will determine the current market value and require you to pay it to keep the equipment and end the lease.
  3. Send it back. I find this one particularly disgusting. After paying possibly 10 x’s the value of the machine over a 4 or 5 year period the leasing company demands you return the equipment to them or they’ll continue to debit your checking account – “eternally”.
  4. Lease buyout This is where they want you to pay for the remaining months of the contract and then the lease is over. I’ve listed this as the worst, but it’s only the worst if you’ve just started the lease, meaning it can potentially cost thousands of dollars, and again – at up to 10 x’s (or more) of the value of the terminal.

In Summary

With options like those listed above it’s no wonder they make sure to get your voice on record over the phone agreeing to the terms they state before you get the equipment. Unfortunately, they don’t disclose all the facts. If they did you probably wouldn’t go through with it.

Basically, they only get you to verbally commit to a “non-cancellable” lease, at “x” amount of dollars, for “x” number of months.

My suggestion? If I was obligated to an equipment lease I would immediately get out my contract and do the following:

  • Understand the terms of ending it… i.e., $1 buyout?, fair market value?, return equipment? etc.
  • I would find the exact month the lease was scheduled to expire – and
  • I’d get out my calendar and mark it for 60 days before the expiration date, upon which time I’d –
  • Send a certified letter stating that I want out of the lease on the expiration date

NOTE: Something most merchants don’t understand is that in the majority of cases the lease WILL NOT END UNLESS YOU TAKE ACTION. That means even if it’s called a “36 month” or “5 year” lease the timeline is only to state when you are eligible to end it – not when it will end.

Just writing about how these companies do business is almost enough to make my blood boil. And it should be enough for you to proceed with caution when leasing credit card equipment!

How Merchants Can Reduce Credit Card Fraud

If you operate a retail or ecommerce business, accepting all major credit cards and electronic checks is a required method of customer payment. However, when you decide to accept electronic payments, business owners must also consider the potential cost of fraud. Studies have shown both traditional and online merchants have lost billions in fraudulent transactions. Today, technology provides proven methods for identifying and preventing fraudulent transactions.

Fraud can come in many forms. Needless to say fraud is bad for business. If you process a fraudulent customer order by the time you find out the credit card was stolen you have already shipped the product. Fraudulent orders usually result in a customer credit card chargeback to your business. Unfortunately, by that time, you have delivered and lost your product, you have lost the income from the sale and to top it all off; you will receive a chargeback fee from your credit card processor. I’m sure we can agree there is a strong need to identify and stop a fraudulent order before you deliver your product. Fortunately for the merchant, there are many steps and processes that can be implemented to reduce and eliminate credit card fraud.

10 WAYS TO REDUCE CUSTOMER CREDIT CARD FRAUD

1. Address Verification Service (AVS) – is a simple and easy to implement process to decrease your chances of accepting a stolen credit card. When you process a credit card transaction; make sure you capture the card holder’s billing address and zip code. Manual non-swipe (Internet and MOTO) transactions will require you to capture card holder information. However, card present (swipe) transactions will not. Once you capture the card holder’s billing address and zip code you’re ready to process the sale. Your point of sale system will verify AVS with the card issuing bank. You can receive a street address match only, a zip code match only or a match on street address and zip code. If you do not receive an AVS match you should consider declining the transaction. Approximately 80% of fraudulent transactions in the U.S. are AVS mismatches. Keep in mind, most AVS systems can be configured so be sure to check your AVS settings. Implementing AVS can have a major impact on reducing credit card fraud.

2. Card Verification (CVV/CVV2) – is similar to AVS. CVV is the 3 digit code on the back of a credit card (4 digits for American Express). Like AVS, CVV is entered at the point of sale. The card holder’s CVV code is verified by the card issuing bank when the credit card sale is being processed. If you do not receive a CVV match you should consider declining the transaction. Online merchants should make CVV a required field.

3. Use a Threshold Management Service – Threshold management allows the merchant to set parameters for the transactions they will accept. For example, transactions can be screened based on the amount of money charged per transaction, the number of transactions charged, transaction frequency, average user ticket, etc. Transactions that are marked as a potential fraudulent transaction will require additional review by the merchant. Threshold Management services are usually available an add-on service.

4. Scrutinize Orders from Free email accounts – Fraudsters and thieves like to hide. One of the easiest ways to hide the identity of a thief is to use a free email account. Most fraudulent transactions use a free email service. Merchants should not decline all transactions from a free email service. However, you may want to provide those orders with more scrutiny.

5. Scrutinize Orders with a different Ship to address than Bill to address – The thief with the stolen credit card may have the owners billing address and zip code. If so, you will receive an AVS and CVV match on their order. However, in order to receive your product they will request the order to be shipped to a different address. Merchants should review all orders with a different ship to and bill to address. If the ship to address is a foreign country pay even more attention to the order.

6. Scrutinize International Orders / Foreign Credit Cards – If your business model requires you to ship to foreign countries you should obtain an International merchant account. Since non domestic orders have a higher rate of fraud than domestic orders, having an International merchant account will provide you with a higher level of protection. In additional, an international merchant account will allow you to settle in the local currency. If you require a domestic and international merchant account you should use a payment gateway with load-balancing. Load-balancing provides the merchant with the ability to use multiple merchant accounts in a single payment gateway account.

7. Understand that an Authorization Code does not mean the credit card is not stolen – An authorization code is provided when the transaction has been approved. However, an authorization code simply means the credit card is valid and has the available credit to process the transaction. Ultimately, as the business owner, it is up to you to decide to accept or reject the transaction.

8. Use an Advance Fraud Protection Service – Advanced Fraud Protection services allow the merchant to block transactions by IP address, Country of Origin and other fraud filters. Advanced fraud protection services are usually available an add-on service.

9. Use a PCI Compliant Data Storage Service – Merchants who have a requirement to store the customer’s credit card data should use a PCI Compliant Data Storage Service. A PCI Compliant Data Storage Service allows merchants to transmit and store the customer’s payment information in a Level 1 PCI certified data facility. Once the customer record has been securely transmitted and stored the merchant can then initiate transactions remotely without having to access credit card or electronic check information directly. This process is accomplished without the merchant storing the customer’s payment information in their local database or payment application.

10. Review and Implement PCI (Payment Card Industry Standards) Policies – Merchants can review PCI Standards online at pcisecuritystandards.org. If you’re using a PCI Compliant point of sale solution and you do not store payment data you’re already in good shape. However, merchants should contact their merchant account provider for more information.

Fraud prevention is a necessary activity for traditional and online merchants. Exposing your business to fraudulent transactions and high chargeback ratios is bad for business and could cause you to lose your merchant account. The leading real-time payment gateway services provide advanced fraud protection tools. However, many fraud prevention techniques can be implemented at no additional costs.

Top Real-time Payment Gateway Services

1. Planetauthorize (Domestic USA and International)

2. Authorize.Net (Domestic USA)

3. PlugnPay (Domestic USA)

4. Skipjack (Domestic USA)

5. eProcessing Network (Domestic USA)