A Beginner's Guide to Accepting Credit Cards

THE SOUND OF ONE CARD SWIPING

Face it, the cash economy is winding down. Credit cards are ubiquitous, and if you're selling anything more than gum and newspapers, you probably should be accepting plastic. If you're ready to enter the world of "merchant acquiring", (the strange name for the process of merchants accepting credit cards), we've put together a little introduction here.

Credit Card processing starts at the point of sale. Say your customer wants to buy a new widget. She hands you a Visa card. The store clerk swipes the card through the electronic terminal, maybe punches some numbers, and waits for "authorization." After a few seconds, the authorization is received, a receipt is printed, the customer signs, and off she goes with her widget.

Here's how Authorization works: after swiping a card, the card number and related data go through an Acquiring Processor (who handles the merchant's side of a credit card transaction), which channels the transaction to the credit card company (e.g., Visa). The credit card company requests authorization from the Issuing Bank (the bank that issued the card). After the Issuing bank approves the transaction, it transmits an approval code back through the credit card company to the Processor and the Merchant at the point of sale.

It's a long electronic trip, but it takes only seconds. And the story isn't over yet — the merchant hasn't been paid! That doesn't happen until "settlement" takes place.

Settling usually happens at the end of the day by either taking paper sales receipts to the bank (common in ancient times) or transmitting the receipts electronically from the card terminal in a batch. The receipts go down the line to the Acquiring Processor, which plays traffic cop, routing the transactions to the different credit card companies. The credit card companies funnel the transactions to the Issuing Banks for posting to cardholders' accounts. At the same time, the Processor credits the merchant's account and a processing fee is deducted, better known as the "discount rate" (typically 1.75% to 3% of the sale).

There's more to credit card processing than our point-of-sale example. What about phone orders, mail orders, e-commerce orders? These are known as "MO/TO" or mail order/telephone order transactions, and the dynamics are different, the risks higher. These orders don't have the benefit of signature verification to ensure the customer's identity. Many financial institutions require that such transactions be covered under separate "Card Not Present" merchant accounts. Expect discount rates to be higher for MO/TO.