Credit Card Processing

Almost as soon as you establish a business presence, you are going to start receiving cold calls or emails about credit card processing. And as your business grows, the question will arise again and again – “Do you take credit cards?”

In today’s world the ability to accept credit card transactions is just part of the landscape. It also represents an area where expertise is hard to come by. Entrepreneurs have to be careful when choosing the right provider of merchant services; the wrong choice of a service package will definitely affect your bottom line. In this article, we’ll cover the basics and some terminology needed to make an informed selection between credit card processing services.

The Basics of Credit Card Processing for Business

Credit card processing is done through a contractual relationship between you, a credit card processing service and the card holder’s bank. You will be required to set up a credit card merchant account that all funds flow through.

There are currently less than a dozen major banks that issue credit cards to their customers. They do not deal directly with merchants, but use third party processors to handle interactions with merchants. There are even fewer major processors, but they have some important functions. For most purposes, these independent service organizations (ISO) will be the “face” you deal with instead of the bank that issued the credit card. An ISO will contract with you for such things as setting rates (how much you pay per transaction), chargebacks, fees, and provide the system you actually use to run credit (or debit) cards through your business merchant account.

The two most common setups use a credit card processing terminal (or POS terminal) or online credit card processing. Services like PayPal’s shopping cart add an additional layer (and fee). This additional layer is called a payment gateway and is common in online retail situations.


  • Issuer – the host bank who’s name appears on the card
  • Processor or ISO – the intermediate between you and the host bank
  • Gateway – an online service that connects to a processor and handles data

Evaluating Processors by Fees Charged

In a sense, you are partnering with your provider to handle a key part of your business. There are two main considerations. The first is the fees you will have to pay for the service they provide. The second is how well they deal with any problems you have. For new customers, fees generate the most confusion.

Underlying all the merchant account rates is the interchange reimbursement fee – this is how much your processor has to pay the host bank for the transaction. Visa sets their own interchange rates and recalculates them periodically, as does Mastercard, Discover and others types of cards. The charges also vary by type of transaction and risk level. Often times a processor will classify some business types and industries as high risk. To recoup this, processors charge merchants in two main ways.

  1. Tiered charging – this structure divides up your communications with your processor into various categories and each tier has its own fee. If you are authorizing a credit card, the type of card and how you run it will fall into one of three levels (up to six levels if you also take debit cards). The rates go up as the difficulty of handling the transaction goes up – a swiped card is lowest (for POS terminals), hand entered information is the next highest and the top tier kicks in for other communications outside of the norm for your business.
  2. Interchange Plus - this rate is based on the rates set by the host banks more directly and you are charged a percentage of the sale as well as a fixed, per transaction fee.

Both of these fees take a percentage of your sales and represent the largest chunk of what you will pay to accept credit cards. When shopping for a credit card processing service, this amount will be expressed as a merchant discount rate. This is the rate most businesses use to compare prices. However, the merchant discount rate isn’t the only thing to consider.

An ISO may offer a lower merchant discount to attract business and then make it up with higher fees in another area. Some of these fees are fixed, some vary by sales volume. Per transaction fees are of the most interest to those who have a lot of small sales – these add up on a per sale basis. They are of less interest to those who have fewer, larger credit card sales. For this second type of business, lower fixed fees are more important.

To get the best merchant rates available, you need to understand how credit card processing will be used in your business – both the expected volume of sales and the likely number of transactions. There is no single provider of merchant account services that meets the needs of every business.

Other Fees

  • An authorization fee is charged every time a credit card is run – whether or not it goes through.
  • Batch fees are paid whenever a set of transactions is settled – this usually only applies to POS type terminals.
  • Statement fees are just what they sound like – you are charged for the statement you get from the processor.
  • Annual fee – set by your contract, this is a general fee to keep a merchant account open.
  • Early termination fee – due if you wish to cancel your contract before the term runs out.
  • Customer service fee – justified by answering questions from customers about charges on their accounts.
  • Monthly minimum fee – this deserves special care, especially if you are just getting into credit card processing and do not know how much volume you will generate. The minimum is based on  how much the processor makes. If your sales are too low to generate this dollar figure, you will be charged the difference. So, for instance, if your monthly minimum is $50 (what the processor earns on your sales) and you only generate a commission of $40, you are liable for $10 to make it up.
  • Chargeback fee – if your chargebacks amount to more than 1% of your sales, there is a fee (and maybe a fine) generated. A chargeback occurs subsequent to a complaint found to be valid by a cardholder. The fines kick in if there has been fraud and for an internet merchant account, the risk may be substantial. Disputes, including chargebacks, are costly for the issuing bank and processor to deal with and they will pass the costs on to you.

Merchant Credit Card Processing

Besides the cost to process credit cards, based on credit card processing rates, your next concern will be finding the best merchant solutions for your business. This deals with the interface and customer service you get from your service.

The best credit card processing is the one that is easiest for you to  use in the normal course of your business. A retail merchant account offline can choose from a variety of credit card processing terminals, up to and including integration across cash registers to a central location. There may be a lease involved for the equipment. The ideal is transparency and the ability to mesh with your current accounting practices. For merchant account credit card processing online, integration and security are the main selling points.

Online users should be careful to differentiate between a gateway and merchant account services. A free merchant account may be offered that is actually a free gateway with charges at the backend for the processing.

Once any system is up and running, processing credit cards should be fast and easy. The credit card processing merchant account should be understandable and any fees expected going in. The so-called best rate merchant accounts will depend on your specific business needs and you have to dig a little to expose all the charges. A little homework on credit card merchant processing will yield benefits and a feeling of control instead of frustration.