Online Credit Card Processing – What Are The Steps Involved In Accepting Payments?

Most of us use credit cards – on e-commerce websites as well as physical stores. However, not many people understand the working of a credit card and the elements involved in moving funds from their account to the merchant’s. In this article, we explain that process (for online transactions specifically).

Types of transactions

Credit card processing includes a set of transactions. These are explained below:

  • Preauth transactions: In a preauth, the validity of the credit card is verified. The charge for preauth is typically around $1.
  • Postauth transactions: In these transactions customers place an order and the product is shipped at a later date. At the time of order, a card hold is applied on the customer’s card. The merchant applies a postauth to transfer the funds after the order has been shipped, also releasing the card hold.
  • Credit transaction: This is the transfer of funds from the merchant’s account to the customer’s.
  • Sales transaction: In a sale transaction, the customer makes a purchase and uses the card to transfer funds from their account to the merchant’s.
  • Chargeback transaction: Chargebacks are cases where the customer disclaims a charge to her card. In such a dispute, the bank withdraws the amount from the merchant’s account and deposits it in the customer’s account till the issue is resolved. The merchant is given some days to prove their case. If they can satisfy the bank with evidence, the amount is transferred back to the merchant. Each chargeback costs the merchant as banks levy a charge for the time and effort involved.

Prerequisites for accepting online credit card payments

You need to have the infrastructure to accept credit card payments on your business website. The requirements are:

  • a Card Not Present merchant account
  • an account with a gateway such as AuthorizeNet, CyberSource, WorldPay, etc.
  • a Vital Tear Sheet to submit to the gateway (provided by the bank)
  • a relationship with credit card types such as American Express; to be informed to the gateway
  • a SSL enabled server

Steps in online processing of credit card transactions

We focus on the processing of a sales transaction. This is how it works:

  1. The customer places an order by filling a form that collects the card details. On submitting the form, the details are sent to the server.
  2. The server processes the information received and directs it to the appropriate software installed on it for card verification.
  3. The software verifies the details provided by the customer. If it is valid, it sends the information to the gateway for further checks.
  4. The gateway validates the card and the availability of funds. Based on the result, it sends an “approved” or “declined” message back to the software. The gateway charges the merchant a fee for this service which can be a fixed monthly rate or a per transaction rate.
  5. Gateways route the transactions to designated clearinghouses (selected by the bank for a credit card type) in batches.
  6. The clearinghouse receives transactions from multiple gateways, batches them for various banks and transfers funds accordingly. Again, this service comes at a fee that ranges between 2%-5% of the cumulative sale.
  7. The clearinghouse transfers funds from the customer’s bank to the merchant’s bank.
  8. On receiving the transaction, the merchant’s bank transfers the amount from the customer’s account to the merchant account. Again, the bank or card issuing company will charge a set of fees for various services – setting up the merchant account, discount rate, chargeback fee, etc.

As you can see, credit card processing isn’t so baffling after all. However, because of the various roundabouts involved in the process, businesses prefer to pay a credit processing company to manage the services instead of taking on the task themselves. With the fall in processor rates, this also makes sense financially.

Are You Losing Business by Only Accepting Cash and Checks?

Many mobile business owners and professionals struggle with payment options. While on the road, moving from one job site (or client) to the next, it can be difficult to keep things organized. Most small business owners have the luxury of a storefront, cash register, and credit card processing terminal. For them, there’s no guesswork or potential “run-around” involved – either the card has funds, or it doesn’t.

Mobile business owners, such as landscapers, trades people, merchants at craft fairs, and others simply do not have these luxuries. Most are limited to accepting cash or check; the latter with no guarantee that there are funds in the account. It can be difficult for them to find a payment method that is convenient for both them and their customer, especially for big-ticket items. Unfortunately, this may often mean that the sale goes instead to the brick and mortar merchant, simply because they accept credit cards and/or provide a financing option that doesn’t involve some sort of collection arrangement.

(In other words, the credit card company acts as the “creditor” for them, in a sense, and gives the customer a self-directed financing plan on their own terms.)

Are you losing sales because you don’t or can’t accept credit cards? This is a problem shared by many mobile business owners. Imagine the sales you might have had at your last trade show or job fair, if payment of a large sum had been easier and more convenient for your customer.

Customers are carrying less and less cash around. We are quickly becoming a plastic consumer society and few people like to bother any longer with the hassle of cash or check books. They prefer the ease and convenience of their credit or debit cards. Are you losing valuable sales because you don’t accept this most convenient method of payment?

Many business owners also prefer credit cards. They offer the advantage instant approval. There is no waiting for days for a check to clear and money to be deposited in your account. Credit cards provide 24-hour payment in a 24-hour world. Payments can be processed quickly, on demand.

What if there was a way for you to accept credit cards from your mobile office or job site? This would enable you to build your business from anywhere, any time. Why should brick and mortar businesses get all the customers?

What would this do for your business? Your business could potentially grow by leaps and bounds – and you’d be making life a lot easier for both your customers, and yourself.

Here’s the good news – you do, in fact, have options. Here are two solutions you should consider:

1. Use a Wireless Credit Card Terminal.

If your typical business day consists of a large number of smaller sized transactions (for example, a pizza delivery business with an average of 40 sales under $30 a day), then you should seriously consider getting a wireless credit card processing machine.

Your monthly fees for the merchant account (and equipment, if leasing) will be average, as will the discount rate per sale, but the convenience factor in addition to the potential increase in sales from customers who don’t necessarily have cash on hand will likely more than make up for the monthly fees, and then some.

2. Accept Credit Cards by Phone

Now, if you run a business where you’re only closing on a few sales a day, but at a higher ticket ($x00 – $x,000), then you’ll want to minimize your merchant account costs because your credit card transactions will be more of an occasional occurrence – even though it will certainly impact your business in regards to convenience, efficiency and potentially even sales.

For example, if you own a landscape business where the average transaction is $600, you’ll find that quite a few clients will want to take advantage of either their card’s built-in rewards points (like “air miles”), the flexible financing – or in most cases, both of these added benefits combined.

The benefit for you is that credit doesn’t “bounce” and in most cases, you’ll have access to the funds much faster than with a check.

Now, here’s the best part – you can accept credit card payments on the spot from any touch-tone phone, including your cellular.

Also, the leading “pay by phone” services available have very low monthly fees and operate in more of a “pay as you go” fashion.

This is the perfect solution for a mobile business – or professional – where occasional credit card transactions are necessary (and profitable), but don’t quite warrant the hassle of using a traditional terminal.

Some services cost as little as a few bucks a month at about 4% per sale.

So there you have it – two very viable options for mobile business types that would otherwise have to remain stuck in the “dark ages” of cash and check payments.

Do your due-diligence to see what service might be best for you and your customers.

Payment Gateway and Accepting Credit Cards Online – The Best Solution for Your Business

An often overlooked and under analyzed segment of building your eCommerce business is the backend processing of your orders. Entrepreneurs invest lots of money and time into making sure their site design is just right, but often gloss right over their order processing systems. Invest a fractional of your time spent in making design tweaks into choosing the right payment gateway, merchant processor, and bank account, and you will save yourself a lot of money!

Payment Gateways

Quite simply, a payment gateway is the system used to transmit your customer’s payment information from your secure website to your secure merchant processor. Think of it as the terminal that collects, encrypts, and securely transmits the data to your merchant account. There are many different services to choose from when picking your payment gateway, although, it is important to know that the gateway you choose must be compatible with your eCommerce solution. PLEASE be sure to get a list of the different gateways your eCommerce solution accepts, and contact each one to learn of their rates and service offerings.

According to a 2009 Internet Retailer report, the 3 most commonly used payment gateway providers by the top 500 eCommerce websites are:

  1. Chase Paymentech Solutions LLC. (113 of the Top 500)
  2. PayPal Inc. (75 of the Top 500)
  3. Cybersource Corp. (45 of the Top 500)

All-In-One (Payment Gateway and Merchant Processor)

PayPal (and other bundled solutions) offer an all-in-one service where you get the payment gateway and the merchant processor together. The advantage here is that you do not have to manage two separate accounts. Rates, however are usually on the higher end of the spectrum.

For example, one of PayPal’s services boasts a flat rate (for national sales) based upon your sales volume. The more you sell, the less they charge you to process the transaction. The benefit here is that regardless of which credit card is used (MasterCard, Visa, Discover, or the dreaded American Express), or whether the card is qualified, you get charged the same flat rate. This is unique to PayPal and other all-in-on services.

Merchant Processors

The payment gateway transmits the encrypted billing data to your merchant processor who is then responsible for routing this data to the credit card network. The credit card network verifies that your customer’s credit card is valid/has enough funds to cover the transaction, then notifies the payment gateway, which then communicates with your eCommerce solution. If the transaction is approved, then the merchant processor will transmit your settled orders to your bank account (sometimes this requires a manual process).

The merchant processor is the behind the scenes system that communicates with the payment gateway, your customers credit card network, and your bank account. This is a streamlined way to accept credit cards online. It’s important to know whether your payment gateway, merchant processor, bank account, and eCommerce solution all work together. Please make sure your merchant processor interfaces with your payment gateway and your bank account!

What to Know

Payment Gateway’s – when choosing a payment gateway verify and review the following:

  • Gateway Setup Fee – many payment gateways will require an initial payment to configure your gateway.
  • Monthly Gateway Fee – this is an ongoing fee for the privilege of using the payment gateway
  • Per Transaction Fee – every transaction made gets charged a fee. This also includes; refunds, voids, and declines.
  • Batch Fee – if you choose to settle up your transactions each day, then you will be charged this fee on a daily basis.
  • API Integration – make sure your websites shopping cart can integrate with the gateway of choice.

When reviewing this data make sure that you understand all the fee’s and requirements. Also remember that you can negotiate pretty much all these items (if you are processing a lot of orders). It’s definitely worth a shot to call and try to get the best rate you can! For example, Authorize.net had a package for high volume sites where they charged $50 a month, but provided 2,000 free transactions plus.07 per transaction thereafter. Added up over time, you can save thousands of dollars per year!

Merchant Processors – when choosing a merchant processor verify and review the following:

  • Setup Fee – same as above
  • Monthly Fee – same as above
  • Per Transaction Fee – same as above
  • Contract – same as above
  • Qualified Discount Rate – this is a very tricky fee to track. The Qualified rate is for specific credit cards, and credit card types.
  • Non-Qualified Rate – understand which credit cards do not qualify as the discount rate so you can crunch the numbers. This fee can be as much as double your discount rate.
  • Minimum Processing Fee – some merchant accounts will require a minimum monthly transaction threshold. If you don’t meet this threshold, you are charged another fee.
  • Order Refund/Chargeback Fee – when orders need to be refunded, or are charged backed, you are usually going to be charged another fee for this.
  • International Fee- check the rates for customer orders outside of the United States to see if you are charged extra.

Services like PayPal charge a flat percentage of the transaction (usually around 2.9% depending on volume), plus the per transaction fee. Most merchant processors charge in the range of 2.2% – 2.65%.

There is often a debate which is the best solution for eCommerce credit card processing.

What do you recommend when it comes to payment gateways and merchant accounts?