TRANSACTION PROCESS

The Credit Card Payment Process

There are many main components or players in the credit card processing process and they are who gets a cut of the fees you pay. They are:

(1) The card associations (Visa, MasterCard, Amex, Discover etc.)
(2) The credit card issuing bank (Yes, they get a cut)
(3) The consumer (Spends Money)
(4) The merchant (Pays the fees)
(5) The transaction clearing house (Verifies cards)
(6) The acquiring processor bank (Accepts Money)
(7) The Automated Clearing House (Sends money)
(8) The merchant bank (Accepts deposits)
(9) The underwriters (Accepts risk for fraud)
(*) Add credit card processing terminal or internet gateway (Connects to clearing house to verify credit cards via a phone line or internet)

The credit card authorization process is basically the same whether your business actually swipes the credit card through the credit card terminal, keys in the credit card on the pad of the credit card machine, or accepts the consumers credit card over the Internet. The main difference is the variable levels of security involved with the different ways to process credit cards. The most secure way to accept credit cards is face to face and the least is over the phone. Internet processing has several new security measures to verify the card holder so this is no longer consider as "high risk" like it was a few years ago.

The following is a step by step explanation of how credit card processing works.

Retail/Storefront Credit Card Processing

• Consumer goes to merchants place of business, chooses goods and/or services, and gives the merchant his/her credit card for credit card authorization
• Merchant swipes the card on the credit card processing terminal and the credit card machine dials the acquiring processor for credit card authentication
• Acquiring processor sends credit card transaction to card association, which in turn sends the request for credit card authorization to the Issuing Bank. The issuing Bank accepts or declines the credit card transaction and sends approval or decline to the card association
• The card association contacts the credit card processor with the credit card authorization, and then the request to deliver goods and services is given to the merchant by way of the POS terminal
• Merchant sends the credit card processing company “fulfillment notification to permit settlement” meaning that the goods and services have been delivered or are ready to be shipped
• The capture takes place when the credit card authorization information is given to the issuing bank and the consumer’s credit card is charged for goods and services requested/received
  ** This entire process takes place in less than ten seconds.
• Finally, when the merchant decides to settle batch, the acquiring processor finalizes the credit card transaction with the issuing bank and they transfer money into the merchant’s bank

Internet Credit Card Authorization

• Consumer goes to a web site, chooses goods and/or services, and fills out the order form
• Consumer enters credit card information into a secured form that is sent over the Internet via Real Time Online Processing software (i.e.Authorize.net), which then sends the encrypted transaction to the acquiring processor for credit card authorization
• Acquiring processor sends transaction to card association, which in turn sends the request for credit card authorization to the issuing bank
• Issuing bank accepts or declines the credit card transaction and sends message to the card association
• The card association contacts the credit card processor with the credit card authorization, and then the request to deliver goods and services is given to the merchant by way of the online credit card processing software
• Merchant sends the credit card processing company “fulfillment notification to permit settlement” meaning that the goods and services have been delivered or are ready to be shipped
• The capture takes place when the credit card authorization information is given to the issuing bank and the consumer’s credit card is charged for goods and services requested/received
  ** This entire process takes place in less than ten seconds.
• Finally, when the merchant decides to settle batch, the acquiring processor finalizes the credit card transaction with the issuing bank and they transfer money into the merchant’s bank

Mail/Telephone Order Credit Card Processing

If the merchant is a mail order/telephone order company, either scenario can be used for credit card processing. If the merchant uses credit card processing hardware, instead of swiping the credit card through the credit card machine, they can key in the information into the credit card machine. If the merchant prefers to use software for credit card authorization, then this can be done using a virtual terminal. A virtual terminal will allow the merchant to process credit cards over the Internet by logging on to the secure socket of the gateway provider and imputing the credit card processing criteria manually.

Next we will go into specific events in the credit card processing system such as credit card authorization, credit card deposits, credit card sales drafts, and balancing/reports.

Credit Card Authorization

The credit card authorization happens when the issuing bank approves the credit card transaction. A credit card authorization number is issued to the merchant services account and payment of goods/services is guaranteed as long as:

• A valid card has been used by the authorized cardholder
• The cardholder has signed the credit card sales draft
• The credit card transaction is not disputed by the cardholder

Credit Card Deposits

After the credit card authorization and the goods and services are rendered, a credit card deposit goes into the merchant’s account and a debit to the cardholder’s credit line is applied. With our credit card processing service, this will happen in no more than 72 hours. Usually the authorization and deposit happen at the same time, but if for some reason the goods/services are delivered at a later date then the merchant services account must conduct a separate deposit transaction.

Credit Card Sales Draft

A credit card sales draft must be completed and imprinted for all retail credit card sales. The credit card sales draft is a legal and binding contract and serves to protect all of the parties involved in the credit card processing system and this is why retail merchants get a lower rate. If your merchant services account account swipes the consumer’s credit card using a POS credit card terminal then your credit card printer should print out a hard copy of the credit card sales draft. If you are a mail/telephone order or Internet based company your credit card sales draft will be electronically produced.

 
A manual imprinter should be used if:

• Merchant has to manually punch in the credit card number, expiration date, etc
• Merchant does not have a credit card printer

The following should be on all credit card sales drafts:

• Retail/Storefront Credit Card Processing
• Credit Card Number
• Credit Card Authorization and Reference Number
• Customer Signature
• Expiration Date
• Date of Credit Card Sale
• Amount of Credit Card Sale
• Description of Goods and Services

Balancing/Reports

A credit card sales draft must be completed and imprinted for all retail credit card sales. The credit card sales draft is a legal and binding contract and serves to protect all of the parties involved in the credit card processing system. If your merchant services account account swipes the consumer’s credit card using a POS terminal then your credit card printer should print out a hard copy of the credit card sales draft. If you are a mail/telephone order or Internet based company your credit card sales draft will be electronically produced.

Trust and the Credit Card Processing System

The credit card authorization system is a system that is based on trust and is designed to protect everyone involved in a credit card transaction. The system protects:

• The Merchant- By guaranteeing that payment will be received for goods and services delivered to the consumer
• The Issuing Bank- Chargebacks will guarantee that the issuing bank will not lose money if the goods and services are not rendered
• The Cardholder- The cardholder’s bank will issue money back from the merchant’s bank if the goods and services are never received

Chargebacks are rare, but they can be damaging to your merchant services account. Because of this we will now go into detail about how a chargeback works and exactly how it can affect your business.

Chargebacks

• A chargeback is presented to a merchant by an issuing bank when the cardholder contests a charge made to their account. The cardholder has a right to contest credit card charges if:
• They were not satisfied with the goods or services that were charged to their credit card bill
• They never received goods or services that they were charged for on a credit card bill
• They never ordered the good or services

How does the chargeback process work?

When a customer complaint about a particular credit card transaction is registered, the issuing bank will usually send a Retrieval Request to your credit card processing company. Your credit card processor will then send it on to your acquiring Bank. There are some cases in which a chargeback is automatically sent before the retrieval request, but again, that is rare. The retrieval request gives the merchant the opportunity, without being charged, to prove that goods and services were delivered. The best way that a merchant can prove that the customer has made a mistake is by presenting a signed credit card sales draft. If the merchant can produce the authorized signature then the complaint is usually dropped.

If the merchant is not able to prove that the credit card transaction is legitimate, then a chargeback is issued. The card association/issuing bank takes the credit card transaction amount out of the merchant’s bank and credits the customer’s credit card account. All chargebacks are put on record at the merchant’s bank. They can severely damage a merchant's account if the overall chargeback rate is over 1%.

Our Banks notifiy you as soon as a chargeback is issued, before the credit card transaction is removed from the merchant’s bank. If your merchant account is issued a chargeback but you are able to prove that the transaction is legitimate, the money will probably be placed back into your account. If the customer issues yet another chargeback for the same credit card transaction, then a Type III chargeback occurs. This can lead to legal action if an agreement is not made concerning the credit card transaction in question.

A merchant’s reserve account can not be used to pay for a chargeback. This account is put in place as a security issue for the acquiring bank and/or credit card processing company.

The only protection that the credit card processing company offers the merchant against chargebacks is a notification of suspicious charges to a particular credit card. If the same amount has been charged to one credit card several times in a row, the credit card processor will not go ahead with the credit card authorization. The merchant will always be notified of such a situation.

Because of the way in which the credit card processing system is set up, the merchant must be committed to doing all that is necessary to prevent questions of trust arising when a credit card transaction has taken place. In other words, it is the merchant’s responsibility to protect themselves against chargebacks and/or fraudulent credit card users.

Avoidance of Chargebacks and Credit Card Fraud

There are some basic things that merchants can do to protect themselves when it comes to credit card processing. They are:

• Make sure you’re dealing with a legitimate cardholder.
• Always check for the authorized signature or verify their address for phone/internet transactions
• With telephone/mail orders, get the name and phone number of the cardholder and tell them that you will contact them before goods/services are delivered. (this is effective because fraudulent users will not want to give out this information) Also, use a ground carrier that requires a signature for delivery and only ship to the cardholder’s billing address. (a crook will not want the goods/services delivered to the same address as the cardholder’s shipping address) If your credit card terminal has the AVS system, the billing address for the credit card used will be known.
• With Internet orders, the merchant should always make sure that their gateway settings verify:
• Cardholder’s address (verification of a legitimate address)
• Cardholder’s IP address (can be used to track down a fraudulent credit card user)
• The ability to produce hard copies of credit card receipts saying that goods and services have been provided
• Try to know the cardholder.
• Use AVS-if the address verification fails on any level then the merchant can refuse the credit card transaction or can call the cardholder to verify a billing address.
• Get a signed receipt and signed proof of delivery. (can be used if issued a retrieval request)
• Merchants should be clear and consistent concerning warranties and return policies when it comes to credit card transactions
• Submit credit card deposit transactions only when goods/services have been delivered.
• Keep merchant id and terminal id secure so no one can make unauthorized credit card transactions, make sure transaction processing equipment stays at your place of business, make sure only authorized personnel have access to credit card equipment, and make sure the Internet software provider, when used, keeps id secure.

Billing Information and Supplies

Any fees for credit card processing or charges for supplies for credit card equipment will be debited to the merchant's bank account on a monthly basis. Also, the Bank will send out a monthly statement showing all transaction, discount and any other fees.

Description and Explanation of Discount Rates, Transaction Fees, and Other Fees

The discount rate is a percentage of each credit card transaction that is charged to the merchant by the credit card processing company. The discount rate varies depending on each merchant account. Higher risk merchant accounts have higher discount rates. For example, there are swiped credit card rates and keyed credit card rates. Swipe rates are for storefront merchants that physically handle the customer’s credit card, swiping it through the credit card terminal. This form of credit card processing is less susceptible to fraud so it carries the least expensive discount rate. If a merchant does credit card transactions through the mail, on the telephone, or over the Internet, the risk is higher because:

• Cardholder is not present at the time of the credit card sale
• Credit card could be illegally produced
• Credit card could be stolen
• Unauthorized use of the credit card
• Customer hits the submit button more then once

The discount rate for this type of merchant, because of the risk involved, will be slightly higher.

Rates have declined over the years as technological advances have made credit card acceptance more efficient and less susceptible to fraud. The first credit cards issued were Diner’s Club cards for use in New York City restaurants. Visa credit cards popularized credit card acceptance. In the beginning, there were no means of protecting merchants and issuers from fraud. A consumer would go into a place of business, present their credit card, and the merchant would go to a magazine-like publication to determine if that credit card account was legitimate. With the advent of the magnetic stripe and electronic data capture, the ability to detect fraudulent activity and delinquent or over limit accounts was greatly enhanced. As a result of this advancement, discount rates charged to merchant services accounts began to decline as the risk was reduced.

The reason for the difference in rates is because the merchant receives payment from the credit card processing company before they receive anything. The credit card processor is taking a risk, trusting that the merchant will provide the goods and services that were promised when the credit card transaction took place.

A merchant’s discount rate can be negotiable if the volume of credit card transactions warrants special attention. Also, please be aware that a lower or higher discount rate is not a good indicator of the quality of service from a credit card processor. Always investigate all aspects of a credit card processing company, and never go with someone just because they have low rates.

The transaction fee is a separate charge from the discount rate, and is usually $.20 -$.40 per transaction.

Other Fees :

• Programming fees (Applies to terminals only)
• Gateway license fee (Visa now requires all internet merchants to be verified by Visa which adds to the cost of the gateway set up)
• Monthly statement fees (Banks have a cost to print and mail statements and merchants need this for tax filing)
• Monthly minimum for the merchant account. In other words, if your monthly volume does not generate a minimum of $25.00 in discount fees and transaction fees, you will be charged this minimum in order for the Bank to maintain the account. Please keep in mind the BANK has to pay customer service fees, 24X7 support fees and 24X7 credit card phone authorization fees and the minimum covers these fees
• If your merchant account is issued a chargeback, (again, this is a rare occurrence) there will be a chargeback fee.
• If you ever require verbal authorization for a credit card transaction, there will be a small fee (a human must verify the charge).
• If you process international credit cards there is a surcharge charged by the card associations to cover the international money rates.
• If you process corporate credit cards there is a surcharge charged by the card associations. This applies mainly to hotels and car rental companies but we're seeing more computer service companies using these cards for their contract workers.

Sometimes your credit card processing company will hold a percentage of each credit card transaction if you have a high-risk merchant services account. We will always notify the merchant if this will be the case.

Credit Card Processing Equipment and Credit Card Processing Software

Once your merchant account is approved, your credit card equipment will be programmed and shipped within 24-48 hours. All credit card equipment will be shipped second day unless other arrangements are made by the merchant. Software will be made available within 24 hours by email.

Customer service is available 24 hours a day, 7 days a week.