The credit card transaction process varies according to where the transaction takes place, what type of card is used, and more. One of the biggest differences, for example, is whether the transaction happens online or in person. And for that in-person transaction, the process will differ depending on whether the physical card is used or if a digital wallet is used.
But across all the variations, the overall transaction process generally involves a consistent set of entities and steps. Here is a simplified overview that includes:
1. The key players in the process
2. The steps in the process
3. The fees involved in the process
To begin, there are two main entities required for a credit card transaction:
the cardholder and the merchant.
Cardholder
The cardholder is the customer who owns the credit card and uses it to make purchases for goods or services.
Merchant
The merchant is the business, person, or service provider that accepts credit card payments from cardholders in exchange for goods or services. The merchant uses a Point-of-Sale (POS) system (hardware) and/or a website, mobile application, or other internet-connected device (software) to accept and process credit card transactions.
As mentioned previously, there are multiple ways of looking at the steps in a credit card transaction, and the entire process will vary depending on where a transaction takes place, what type of card is used, etc.
But let’s start with the basics: the credit card process verifies that the customer has money and then transfers that money to the merchant. There are other steps, some of which can be combined, and some that take a matter of seconds.
But at its simplest, the credit card transaction process is:
Step 1: Authorization
Checks to see if the customer has sufficient funds for the transaction.
Step 2: Capture
The transaction is approved or declined, and funds are taken from the customer, if approved.
Step 3: Settlement
The funds are transferred to the merchant.
Note: Many merchants do steps 1 and 2 at the same time, however, it’s possible to do them hours, days, or weeks apart. This is helpful for merchants who don’t immediately provide the goods or services. We’ll cover this more later in the ways to reduce expenses section.
As with the players and steps, the credit card processing costs can vary according to what type of card is used, the amount of transactions a merchant processes, and more. It’s incredibly important for merchants to understand what costs they may be charged so that they can make educated decisions and take steps to minimize their processing costs.
Below are the main types of credit card transaction fees a merchant may encounter:
Interchange Fees
Interchange fees are usually a percentage of the transaction amount, plus a fixed, per-transaction fee. The card associations set new interchange rates twice a year that outline hundreds of different interchange rate categories and associated fees. The interchange fee varies depending on the card type (Visa, Mastercard, etc.), the merchant’s industry, whether the transaction is in-person (“card present”) or online (“card not present”), credit card reward programs, level of fraud risk, etc. Every transaction is assigned a rate depending on these factors.
The issuing banks receive the largest percentage of interchange fees because they not only take on the most risk in the transaction, but they also provide incentives to cardholders to use their cards via various rewards programs.
Assessment Fees
The card networks often charge assessment fees to use their platform. These fees are typically a small percentage of the transaction amount and vary according to which network is used and the merchant’s overall transaction volume.
Processor Fees
The merchant is the business, person, or service provider that accepts credit card payments from cardholders in exchange for goods or services. The merchant uses a Point-of-Sale (POS) system (hardware) and/or a website, mobile application, or other internet-connected device (software) to accept and process credit card transactions.
Payment Gateway Fees
A payment gateway provider typically charges a monthly fee and/or a per-transaction fee for their services in transmitting information to the processor.
Terminal and Equipment Fees
Depending on what POS terminal, card reader, or other equipment a merchant uses to accept credit card payments, these costs cover purchasing or leasing equipment, along with regular software updates.
CHARGEBACK FEES
If a customer disputes a transaction, the merchant may be charged a fee for the chargeback/dispute process.
PCI COMPLIANCE FEES
To ensure the security of cardholder information, merchants must comply with the Payment Card Industry Data Security Standard (PCI DSS). Many processors charge a fee for PCI compliance, while others may include it.
With so many players in the process, and each taking their own fee for their services, it’s wise for merchants to take advantage of any opportunity to reduce their costs. Even if it’s only a small percentage, the savings add up quickly.
Next, we’ll look at the most common ways to save money on transactions:
For businesses that regularly deal in high-priced items, there are large-ticket interchange rates available from Visa and Mastercard. These rates can help bring down the total cost of acceptance for a merchant when compared to the standard interchange fees. Merchants should contact their merchant service provider to see what is required of them to access these rates.
Tokenization is a more common saving method for merchants. By using tokens as part of the transaction (meaning they are using stored payment information from customers who have been verified), merchants can qualify for discounts, as well.
B2B and B2G transactions are classified differently than consumer credit card transactions, which is great news for savvy merchants. Qualifying B2B/B2G cards, such as corporate and purchasing cards, allow more detailed transaction and customer information to be submitted. This lowers the risk of fraud, which in turn, decreases processing fees. The transactions can be categorized into one of three levels: level 1, level 2, or level 3. As each transaction progresses to the next level, the rate gets better due to more information being submitted.
Interchange optimization is a way to ensure that all transactions are submitting the data fields required for a transaction to qualify for the best rates. Managing this process can be tedious and time-consuming, but when merchants use a service that helps them optimize and submit the required enhanced data fields, they save hours of work while simultaneously qualifying their transactions for the best interchange rates.
In general, here are the data levels explained along with the kinds of transaction data
required to qualify for each level’s associated rate (these are examples only and subject to change):
Level 1 Data
Level 1 card data is the most common type of credit card transaction data.
The data fields required to qualify for Level 1 are:
Merchant DBA name
Billing ZIP code
Transaction amount
Level 2 Data
Level 2 card data is the next step up, meaning if a transaction qualifies for Level 2, processing fees will be lower than a Level 1 transaction. Level 2 data includes all of Level 1, in addition to the following fields:
Sales tax amount
Customer reference number or PO number
Merchant postal code
Tax ID
Merchant minority code
Merchant state code
Level 3 Data
Level 3 data provides line-item details typically beyond what is required for consumer card transactions. This data is generally equivalent to the info found on an itemized invoice. Level 3 data includes Levels 1 and 2 fields, plus the following data fields:
Quantity
Product code
Product description
Ship-to ZIP
Freight amount
Duty amount
Order/ticket number
Unit of measure
Extended item amount
Discount indicator
Discount amount
Net/gross indicator
Tax rate applied
Tax type applied
Debit or credit indicator1
Alternate tax identifier
B2B companies that do pre-processing or ship orders out a few days or weeks after orders are placed usually authorize a transaction first to ensure there are enough funds on the card, and then capture the transaction later when they are ready to fulfill the order. These types of transactions may be charged a higher rate than transactions that are fulfilled immediately (when the transaction is authorized and captured at the same time).
There are rules regarding distribution as to when you can authorize and capture, so a merchant may not see a lot of room for improvement in this regard. But overall, it’s good to evaluate which transactions are being authorized and captured at the same time vs which ones are being done separately to make sure the best rates are being realized.
Prior to 2013, merchants were not allowed to charge their customers for using a credit card, and were, in many cases, fined if they were found to be doing so. But in 2013, the practice of surcharging became an allowable practice. Though the rules and regulations vary from state to state, in essence, merchants can now add a surcharge, up to 3% of the transaction amount, to a customer’s order anytime a customer uses a credit card for payment. Surcharges help merchants offset the credit card interchange fees they pay to accept credit cards.
Merchants should regularly review their monthly statements to see what fees they are being charged and whether there are areas they can improve to receive better rates. Again, even if only a few small tweaks can be made here and there—whether it’s using tokens, or getting Level 3 rates, or adding a surcharge—those savings will start to add up over time. Especially for merchants processing a high volume of transactions.
At PayTrace, we are always happy to review your current statements with you to see what areas can be improved.
Please share some details and a member of our team will be in touch.