The Ultimate Guide to Credit Card Processing for Small Businesses
If you are a small business owner, you know that accepting credit cards is a must in today’s digital world. However, credit card processing can be confusing, and fees can quickly add up. In this guide, we will explain everything you need to know about credit card processing and how to get the best rates for your business.
What is Credit Card Processing?
Credit card processing is the process of using an electronic system to handle transactions made with credit or debit cards. It involves several parties, including the cardholder, the merchant, the merchant’s bank, and the cardholder’s bank. When a card is swiped or tapped, the merchant’s bank sends a request to the cardholder’s bank to verify the transaction and ensure that the card has enough funds for the purchase. If the transaction is approved, the funds are transferred to the merchant’s bank account, minus the fees charged for processing the transaction.
How Does Credit Card Processing Work?
Credit card processing involves several steps that take place in a matter of seconds:
- The customer presents their credit or debit card, and the merchant swipes the card or enters the card information manually into the payment system.
- The payment system sends the card information to the merchant’s bank to verify the transaction.
- The merchant’s bank sends the transaction details to the cardholder’s bank to approve or deny the transaction.
- If the transaction is approved, the funds are transferred to the merchant’s bank account, minus the fees charged for processing the transaction.
Types of Credit Card Processing
There are two primary types of credit card processing: card-present and card-not-present.
Card-present processing occurs when a customer swipes or inserts their card into a terminal or other payment device. This type of processing is considered lower risk, and the fees are generally lower.
Card-not-present processing occurs when a customer makes a purchase online, over the phone, or by mail. This type of processing is considered higher risk, and the fees are generally higher.
Credit Card Processing Fees
Credit card processing fees can be complicated, and it is essential to understand how they work to avoid being overcharged.
Interchange fees are fees charged by the cardholder’s bank (issuer) to the merchant’s bank (acquirer) for processing a credit card transaction. The fees are determined by the card brand (Visa, Mastercard, etc.) and the type of card (debit, credit, rewards, etc.). Interchange fees are non-negotiable and cannot be avoided.
Assessment fees are fees charged by the card brands (Visa, Mastercard, etc.) for the use of their networks. Assessment fees are also non-negotiable and cannot be avoided.
Processing fees are fees charged by the merchant account provider for processing credit card transactions. Processing fees vary widely and can include a monthly fee, a per-transaction fee, a statement fee, and other fees.
How to Get the Best Rates for Credit Card Processing
Getting the best rates for credit card processing can save you hundreds or even thousands of dollars per year. Here are some tips to help you negotiate better rates:
- Shop around for the best rates. Don’t be afraid to ask for quotes from multiple providers.
- Negotiate based on your business’s size and transaction volume. The more transactions you process, the more negotiating power you have.
- Ask for interchange-plus pricing. This pricing model separates the interchange fees from the processing fees, making it easier to understand and compare costs.
- Avoid contracts with early termination fees. You should be able to switch providers if you are not satisfied without penalty.
Level 2 and Level 3 Processing
Level 2 and level 3 processing are additional levels of data that can be included in credit card transactions for businesses that process large volumes of transactions or transactions with higher dollar amounts.
Level 2 Processing
Level 2 processing requires businesses to provide additional data, including tax information and customer codes, for transactions over $50. Level 2 processing can help businesses lower their interchange fees.
Level 3 Processing
Level 3 processing requires businesses to provide even more data, including item descriptions, quantity, and unit price, for transactions over $5,000. Level 3 processing can significantly reduce interchange fees for businesses that process large transactions.
In conclusion, credit card processing is an essential part of doing business in today’s digital world. Understanding the fees and knowing how to negotiate for the best rates can save your business a significant amount of money. Consider using level 2 or level 3 processing if your business qualifies to reduce your interchange fees. Remember to shop around for the best rates and avoid contracts with early termination fees. Good luck, and happy processing!
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