The 3 Ps of payment processing

Players

There are three main players when it comes to processing credit and debit card payments, whether online, over the phone or in person. On one end there’s you, the business owner or merchant. On the other is your customer. And in between, there’s a lot of technology that connects you.

1. You, the business. To accept card payments from customers, you’ll need to partner with some key players. As a business, it’s likely you’ll need a merchant bank (sometimes called an acquirer) that accepts payments on your behalf and deposits them into a merchant account they provide.
2. Your customer. For your customer to pay for your goods and services, they need a credit or debit card. The bank or card provider that approves them for the card (and, in the case of credit cards, lends the cash to pay you) is called the issuing bank or issuer.
3. The technology. In the middle are two technologies that enable you and your customer to transact. The first is the payment gateway, software that links your site’s shopping cart to the processing network. The second is the payment processor (or merchant service), which does all the heavy lifting: moving the transaction through the processing network, sending you a billing statement, working with your bank, etc. Often, your merchant bank is also your payment processor which helps simplify things a bit.

Payments

As a business owner, it’s helpful to understand exactly how money moves from your customer to your business. There are two stages to payment processing: the authorisation (approving the sale) and the settlement (receiving the money).

The authorisation process goes roughly like this:

1. Your customer buys an item on your site with a credit or debit card.
2. The payment gateway encrypts the data to keep it private and sends it to the payment processor.
3. The payment processor sends a request to the customer’s issuing bank to check to see if they have enough credit to pay for the purchase.
4. The issuer responds with a yes (approval) or no (denial).
5. The payment processor sends the answer back to you that the sale was approved.

And that all happens within a second or two.

The second piece of the process (where you get paid!) is the settlement:

1. The payment processor tells your merchant bank to credit your account.
2. The card issuer sends the funds to your merchant bank.
3. Your merchant bank deposits the money into your account.
4. You access the funds.

The settlement process can take a few days. Sometimes your bank will let you access the money before it’s even sent to them. They might also keep a portion in your account that you can’t touch, just in case the customer returns things later (called a reserve in payments speak).

Pricing

As you’ve probably guessed, everyone who touches the transaction gets paid, including the issuing bank, the credit card association (Visa, Mastercard, American Express, etc.), the merchant bank, the payment gateway and the payment processor.

At its most basic, every time you process a sale transaction, you pay 4 fees:

• A percentage of the transaction amount: The issuer gets paid by taking a percentage of each sale, called the interchange. This fee varies depending on things like industry, sale amount, type of card used and country of everyone involved. At last check, there were well over 100 different interchange fees!
• Another percentage of the transaction amount: The credit card association (Visa, Mastercard, American Express, etc.) charges a fee, called an assessment.
• Yet another percentage of the transaction amount: Your merchant bank takes a cut by charging you a percentage fee. The amount here also varies by industry, amount of sale, monthly processing volume, etc.
• A dollar amount for every transaction processed: The payment processor (who might also be your merchant bank) makes money by charging a fee, called an authorisation fee, every time you process a transaction (whether it’s a sale, a decline or a return). Plus, it can charge fees for setup, monthly usage and account cancellation.

The first 3 fees (the percentages) are usually all added up together and quoted as a single rate, while the transaction fee is quoted separately (e.g. 2.6% + $0.30).

To make things even more complicated, most pricing structures generally fall into one of 3 categories:

• Flat-rate pricing sees you paying a fixed percentage for all transaction volume, no matter what the actual costs are. All of the above fees are baked into this single rate. For example, you’re charged a bundled rate of 2.6% of the transaction amount plus $0.30 per transaction. On a $100 sale, the fee you pay works out to be $2.90.
• Interchange plus pricing means your payment processor charges a fixed fee on top of the interchange. For example, 2.0% + $0.10 on top of a 1.8% interchange fee. On a $100 sale, that works out to be a $3.90 fee. Of course, remember there are 300 or so different interchange fees so that 1.8% can vary dramatically.
• Tiered pricing means the payment processor takes the 300 or so different interchange rates and lumps them into 3 buckets (or pricing tiers): qualified, mid-qualified and non-qualified. This makes it simpler for you (and them) to understand. However, because the processor defines the buckets, it can be expensive. As an example, the fees you pay on a $100 sale could range from $2.50 to $3.50, depending how it has been classified.