Transaction Processing
In the credit card world, a transaction is any communication with the card issuing bank. You are probably already familiar with how this works if you’ve used an ATM machine. You don’t have to withdraw money; you can input your PIN and check your balance or make a deposit. Each of these activities is a type of transaction and each requires that the machine communicate with your bank remotely.
This is similar to how transactions are handled in the credit card world. The difference is that while ATM transactions do not always generate a fee, credit card transactions do. There are also more types and the fees vary depending on what type of card is accepted and how the information is entered. Furthermore, the fee is paid by the retailer, not the customer.
Behind the Scenes
Between the POS (point of sale) and the card issuing bank lies transaction processing software and hardware. Secure transaction processing is the rule, and the software is responsible for encrypting the information and decoding the response received. The transaction processing system software is also called the payments gateway.
No matter how the information is collected from the customer (scanned in or entered in manually, online or offline) the data is sent through the same communication channels and is either accepted or rejected for payment. Remember, any communication that uses the transaction processing systems will generate a fee, so errors that require duplicate submissions, or rejections also cost money.
Most merchants do not deal directly with a credit card issuing bank. The data collection and transmission is handled by a third party. This company is also sometimes referred to as the payment gateway because they provide the software (and sometimes the hardware as well) that allows the credit card transaction processing.
What is Payment Gateway?
When you sign up for a merchant account with a company that manages credit card transaction systems, they will offer you a variety of choices, or payment solutions, for accessing their system. These may be an online shopping cart (online payment system), a credit card terminal (for counter sales), or even a mobile scanner (for remote access). Any or all of these are part of the term payment gateway.
The reason the term matters is because for Internet merchant credit cards, the payment gateway may not be connected to a merchant account at all. Some companies will act as a middleman, between you and the authorization processing – Paypal is the best example of this. Members sign up and can accept credit card payments even though they do not have a merchant account at all. Paypal then acts as the intermediary and collects a fee (usually from the seller).
How are Fees Determined?
For most accounts there is a small, fixed fee for every transaction run through their system. This can range from a few cents up to twenty-five cents at the high end. Remember, this is for every transaction, not just those that result in a sale. Also, this fee is separate from the discount rate (the percentage of overall sales you pay to a credit card company).
The fees also vary by type of transaction and which payment instrument is being used. So, for example, a credit card taken online might generate a higher transaction fee than one scanned in at a cash register. The reason for this is that the risk level varies. It is more risky to take numbers anonymously online than it is to handle a physical credit card, face-to-face, and get a valid signature. The term for the riskier (higher fee type) is “card not present.”
In practice, a business that runs a great many individual transactions will try to get a lower transaction fee and accept a higher discount rate. Another business, that makes fewer individual sales for higher amounts, would do better with a higher transaction fee and a lower discount rate.
To restate the above: High number of sales means more transaction fees. Higher dollar amount of sales means a higher payment based on discount rate. One of the critical choices when deciding which company to use for authorization processing is matching the different fees to how you do business.
Example: Business A does an average of one thousand transactions to get $10,000 in sales. They will be charged the flat rate for a thousand transactions and the discount rate on $10,000.
Business B does a hundred sales to reach the same $10,000 gross.
Business A would be more interested in a lower per-transaction fee and may accept a higher fee on volume to get it. Business B might do the opposite – look for the lowest possible discount rate even if they have to pay a higher flat fee for each transaction.
How Does the Type of Transactions I Do Affect the Rates I Am Offered?
Restrictions and fees are based on the following factors, most of which relate to how much risk your business presents (they will automatically raise the discount rate you are offered):
- Businesses with inherent risk: Statistically, the hospitality industry, adult themed material, travel and others have a higher chargeback ratio and more risk.
- Foreign sales: Some countries have been identified as generating more fraud. If your business is located in one of these places or you transact a large percentage of sales there, your rate may be higher.
- Your credit history: Your personal credit history, the history of your business (if any) and any prior relationship with a credit card processing service will reflect, for or against, the rate you are offered.
- Volume of sales: If you generate a high sales volume (many thousands to millions) your business may qualify for a lower rate. Conversely, a lower sales volume will mean higher rates.
- Online or offline: As mentioned above, card not present sales are riskier and have higher rates to merchants. Since all online sales are of this type, iff you do 20% or more of your sales either online (or over the phone/mail order/fax) then you will pay the higher rates.
