Credit Card Processing When You Run a Business

Congratulations! You own a business. It took a lot of hard work to get there, but now you have to keep that business afloat. A smart way to improve your business is to constantly educate yourself and your employees about the logistic and operations that happen behind the scenes. For example, credit card transactions happen more often than cash transactions. But do you understand how credit card processing works and how it affects your business? Let us give you a quick break down.

How It Works

In the credit card transaction world, there are four entities involved with every transaction. The merchant, the merchant’s bank, the customer and the customer’s bank.
The merchant- a term used for the business or person who receives payment for a product or service.
The merchant’s bank- is the entity the business uses to be able to provide credit card payment as an option.
The customer- is the person or entity who makes the payment to the merchant.
The customer’s bank- is the entity that issued the customer the credit card.

Transaction Fees

The money in the credit card transaction is provided by customer’s bank. Depending on the customer, that debt will be paid off within 30 days or it will be added to the credit card balance and interest will accrue. As well, the merchant’s bank provides a loan to the business owner.

Fees are deducted from both, the merchant’s bank and the customer’s bank. This means that the amount the merchant receives at the end of a transaction is less than the amount the customer originally paid. These fees are percentages of the amount of the transactions, but a small fixed amount can be also added. What you need to know is that the customer bank’s fees are charged to the merchant’s bank and, therefore, the merchant itself. The fees depend on the type of card if the credit card is physically present and also the type of business.

The Fear of Chargeback

The customer’s bank wants to be compensated for the risk of chargeback associated with credit card transactions. A chargeback happens when a customer is not satisfied with a product and purchase and instead of going directly to your business, they go to their credit card provider, fights the charge and wins. When this occurs, the merchant’s bank will take back the amount paid to the merchant plus fees.

Purchases over the phone and the internet, especially if transactions are big and the business is prone to complaints, are at higher risk of chargeback. The safest transactions are those where the customer is there present to swipe and sign. Also, if the business sells standard products or services, and transactions are for low amounts. That is why restaurants and gas stations get lower fees charged from the customer’s bank.

Despite the risk, the merchant’s banks will put the money from the transaction in the merchant’s account a couple of days after the date of the transaction. The merchant’s bank sees this as a loan. That is why when you apply for merchant services, you are under high scrutiny and ask that you backup transactions with your assets.

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