MERCHANT PROCESSING 101

Accepting credit, debit and other payment cards is no longer a luxury. It can make all the difference between making the sale and losing it to one of your payment card-accepting competitors. Credit cards and other payment cards not only increase the consumer’s buying power and impulse purchasing, but also most often result in a higher average sale amount than cash transactions.

Credit card processing is divided into the categories of issuing and acquiring. Issuing is the act of granting credit cards with credit limits to consumers. Acquiring is the act of granting credit card processing to merchants who want to sell goods and services by this payment method. NDMS is a tier one direct payment processor – or acquirer – that works in conjunction with major payment card associations such as Visa and MasterCard. NDMS also offers integration with American Express, Diners Club, Discover and debit cards to process all of your payment card transactions.

While a great advantage to your bottom line, accepting credit cards brings with it a number of necessary fees, regulations and requirements. NDMS wants to help you to become fully educated on merchant service industry terms and operations, the credit card process and how to best navigate all of the options involved with accepting payment cards and other non-cash payments.

A credit card transaction involves a number of participants and activities, from the initial card swipe to the payment that is ultimately provided to the merchant. These all benefit from the transaction fees that you pay.

The following diagram depicts the credit card process from start to finish and outlines the players involved.

Payment Card Processing Participants

Acquirer /Processor ( NDMS )

This is the entity that provides businesses with a merchant account, which extends a line of credit to the merchant, and processes the transmission of payment data that is necessary to authorize and settle credit cards and other payment card transactions. On the front end, the processor deals with immediate card authorization, connectivity to card associations and network authorization. On the back end, the processor receives and forwards settlement batches to the issuing banks within a scheduled time frame.

Card Association (Visa, MasterCard)

The payment card association is a network of issuing banks and acquiring banks that process payment cards of a specific credit card brand.  The associations are responsible for the maintenance of the worldwide transaction clearing and settlement systems that process billions of transactions daily. These organizations also set and enforce industry regulations and develop products to increase card usage.

Issuing Bank (Chase, Citibank, Capital One)

An issuing bank is a financial institution that offers card association branded payment cards directly to consumers. When it comes to credit cards, the issuing bank is the entity that extends a line of credit to the cardholder. Issuers are also responsible for maintaining rewards programs that drive card usage.

Payment Gateway (Authorize.net, USA ePay)

These entities act as the front-end connection to the card associations. Payment gateways transfer payment data from the merchant to the issuing bank or processor as required. Payment gateways support most eCommerce software, shopping-carts, point-of-sale systems, banks, processors and merchant types.
 

Merchant service terms that you should know

Accepting credit cards brings a whole new series of merchant service industry terms that you may not have been previously aware of. Below, NDMS has provided some of these essential terms as they relate directly to the cost for merchants to accept credit cards. Additionally, on this website, you will find a comprehensive list of other important terms in the online glossary.

Interchange Fees

Other than American Express, the major payment card associations charge an interchange fee for processing each transaction. This fee is based on how the transaction is sent, the consumer’s issuing bank card type, and the type of merchant account that you have. Usually stated as a percentage of the total bill plus a flat cost per transaction, this fee covers the costs and time associated with getting funds to your merchant bank and providing related billing information to the issuing bank.

Rates

The rate is the primary cost you will pay to process a payment transaction and to deposit the funds into your preferred bank account.

The rate charged for each transaction depends on how it was processed – in person, online or by telephone and the card type. Transactions that are performed in person, where the actual card is swiped, will generally qualify a merchant for the lowest rate. To keep your costs low, process your transactions at the qualified rate, whenever possible.

Qualified rate is the percentage fee that is charged based on the card type and whether a merchant accepts and processes a transaction with a payment card and cardholder present, using an approved processing solution. This is usually the lowest rate you can receive, and often the one quoted to a merchant inquiring about rates before the open a merchant services account.

Mid-qualified rate is the percentage fee that is charged based on the card type and whenever a merchant accepts and processes a card that does not qualify for the lowest rate. This may happen when a card is manually keyed into a terminal instead of being swiped or when a rewards or business card is being used. Where transactions possess a somewhat elevated fraud risk, the qualification level therefore requires a higher fee.

Non-qualified rate is the percentage that is charged based on the card type and whenever a merchant accepts and processes a card that does not qualify for either of the lower rates listed above. This may happen when a card is processed for an online sale, when a card is manually keyed into a terminal versus being swiped, address verification is not performed, there is some other identifying information is missing or the authorization is not settled within the allotted time frame. Where transactions possess the highest fraud risk because of the absence of a physical cardholder or crucial security information they therefore require a higher fee than a Mid-Qualified Rate.

Downgrades

A downgrade occurs when one or more of your qualifying requirements have not been met, thus increasing your risk exposure and is based on card type. The higher the risk, the more you will have to pay to the merchant service provider and the other entities to process that particular payment transaction. A large portion of the costs associated with accepting credit cards stems from transactions that do not qualify for a discount rate because they do not meet the data content or transmission timing regulations required by the card associations. Some of the more common reasons for a downgrade of a merchant’s discount rate include not settling the transaction within 48 hours of the initial authorization, missing or invalid data, corrupted swiped data and the absence of address verification on manually keyed sales transactions.

Authorization Fee

All processors charge a flat fee per transaction that is either listed separately or bundled with your rate. Each card transaction submitted to the associations incurs an authorization fee.

Chargebacks

A chargeback results when a cardholder contacts the payment card issuer and refuses to accept a charge appearing on their monthly billing statement. The cardholder has up to 180 days from the statement date to dispute a charge and formally initiate a chargeback. When the cardholder files a complaint with the issuing bank, the merchant will receive a retrieval request, which can cost from $10 to $250. If, as a merchant, you do not respond in what your provider deems a timely manner, you may also be charged a timeliness fee or lose the transaction payment completely. When a refund is issued, you will often lose the interchange fee you paid on the original transaction, as well as the full sale amount.

Merchant agreement

A merchant agreement is a business arrangement between a service provider –
or merchant – and a credit card processing company. In this arrangement, the merchant pays the processor certain fees in exchange for the ability to accept credit or debit card payments for the operation of their business.

Merchant Responsibility

As a merchant, there are a few things that you need to be aware of when you begin to accept credit cards. Below is a list of do's and don'ts that can help protect you from accruing fines or even losing your merchant account.

DO

• Verify the identity and expiration date on the payment card.
• Truncate all account numbers on your receipts. Each state has its own laws governing what can and cannot appear on the receipt.
• Take every measure possible to prevent duplicate transactions.
• Carefully read your merchant services agreement. It outlines all of the various fees and charges, as well as specific rules and regulations that you need to be aware of.
• Make it a priority to resolve customer issues immediately and completely.
• Take advantage of the various fraud screening products and services available to merchants.
• Ensure that old merchant accounts are properly closed and terminated.
• Maintain the proper merchant services account for your business. For example, trying to process Internet transactions with your retail merchant account can lead to serious fines and even the loss of your merchant account.

DON'T

• Don't run your personal credit card through your own merchant account or use it to provide cash to yourself or a friend.
• Don't place minimum or maximum limits on your transactions. Regulations stipulate that if you are going to accept credit cards, you must accept them for any sales transaction.
• Don't charge any sort of usage fee for credit card transactions to offset the cost of accepting credit cards.
• Don't split a transaction into smaller transactions. You may open yourself up to a chargeback.
• Don't request a credit card to guarantee a check.