How Credit Card Transactions Work
Before being able to accept credit card transactions, a merchant will need to set up an
account with a merchant bank. A merchant account
is an industry term for a banking relationship whereby you and a bank have arranged
to accept credit card payments (usually, a local bank can suffice for this kind
of relationship). Setting up a merchant account usually involves the
bank understanding your business and working with a third-party processor to
arrange a mechanism for accepting payments.
Once a merchant account and third party processor have been selected and established,
an online merchant can begin to accept credit card payments.
For illustrative purposes, let''s say that an item you''re selling online is priced
at $100.00 and a customer wants to pay for it with a Master or Visa Card (these
are far and a way the most popular, handling about 72% of all purchases made by
credit card).
First, your customer fills out a form on your web page or activates an electronic
wallet that holds his/her credit card information. This information is transmitted
to you (via a secure or insecure transmission) and then forwarded (automatically)
to the third party processor (or "acquiring bank"). Again, third-party processors are
specialists or banks that you have
hired to process your credit card transactions (examples include: First Data,
Paymentech, Bank America Merchant Services). These processors send a secure
message to the bank that issued the card ("issuing bank") to the consumer/buyer
(for example First National, MBNA, Fleet, etc.).
The issuing bank verifies that sufficient credit is available on the consumer''s
card, that the account is active, and tries to detect (through a complex set of
algorithms) potential fraudulent use of the card. Once the transaction is
authorized, the issuing bank sends the "merchant''s processor" the $100 --
the price of the item. The "merchant processor" (now confusingly called the
"merchant acquirer") sends the proceeds to the retailer''s bank (this is YOUR
bank).
There is a fee, however, taken for this service. It is often called a "discount
fee," and typically is in the range of 1.5%-2.0%. By negotiating carefully, you
may be able to save a lot of money by getting the lowest rate possible. This
savings can add up to substantial amounts over time--- so, don''t neglect this!
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