If you’re a business owner considering venturing into the world of plastic payment, there are some important things you need to know about credit card processing. Going into it without understanding how the process works, or what it will mean to your business, could end up costing you more money than you are prepared to spend.
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According to numbers from the Federal Reserve, outstanding credit card debt in the United States rose to nearly $790 billion as of April 2011. Business owners who do not accept credit cards have to consider whether they’re interested in obtaining a piece of the financial pie credit card transactions represent. Either way, we can’t escape the fact that consumers are continuing to use credit cards for more and more purchases.
The Cost of Processing Credit Cards
Typical credit card transactions take, at a minimum, the participation of three entities. Depending on the card issuer and the banks involved, there could be as many as five entities in the line. Regardless of the total number, each entity must make some money along the way in order to keep the credit card business flowing. As the last two members of the credit card food chain, the merchant and consumer end up absorbing most of these costs.
There are usually two fees assessed at the merchant level. The first is the interchange fee charged by an issuing company like Visa, MasterCard, or Discover. Interchange fees usually range between 1% and 3% of the total transaction. That’s why some merchants charge extra for credit card purchases; their extra charge is intended to recover the interchange fee.
The other fee is a processing fee collected by the company that actually handles a merchant’s credit card transactions. These fees can be in addition to equipment rental fees, or part of the standard monthly rental. When they are charged separately, it is usually no more than 2% of a transaction’s value. Combining both interchange and processing fees could result in a total cost of up to 5% per transaction for the merchant.
The Need for a Processing Company
The second entity in the transaction line is the credit card processing company. The processing company verifies the transaction electronically, then sends the data to the banks and credit card companies involved and arranges for payments to be made.
The processing company is perhaps the most involved throughout the entire course of the transaction. Because credit card issuers don’t deal with individual merchants, you will need to use the services of a processing company if you want to accept credit cards.
The processing company you choose will most likely provide electronic processing equipment in exchange for a monthly rental fee. With this electronic equipment, such as an Ethernet credit card terminal, you can accept credit cards and have them verified instantly via a telephone line or the Internet. These electronic terminals aren’t absolutely necessary, but without them, you might be filling out credit card slips by hand and taking the chance that any given card you accept is still valid.
Security Is a Must
It goes without saying that merchants who accept credit cards must make security a priority. According to nonprofit technology information provider TechSoup, businesses and nonprofits that wish to accept credit cards must sign a legally binding contract in which they agree to take all the necessary steps to follow what’s known as the Payment Card Industry Data Security Standard. Failure to uphold the standards usually results in stiff fines. For especially egregious offenses, a merchant may be banned from accepting credit cards in the future.
The requirement for security is one of the things that have prompted the widespread use of electronic terminals. Using such terminals eliminates the risk of paper slips being stolen or the copying of information by employees. Other methods of secure transactions include utilizing a bank merchant account, using an online processor, which requires your customer to input data directly, and set up a secure website to accept credit cards online.
There are a couple of other things you’ll need to know about the mechanics of credit card processing should you decide to go this route. Your processing company will go through all the credit card processing options and details when you sign up for the service.
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