A major part of starting a business is deciding how you will accept payments for your product or service. If you decide you want to accept credit or debit cards, you’ll discover that you need to set up a merchant account with a credit card processing service and have the equipment or software to process cards. Since it is not inherently easy to understand how credit card processing works, I will start by explaining the basics:
Credit Card Processor: A corporation that manages the process of transferring authorized and captured credit card funds between different financial accounts.
Merchant Account: An agreement between your business and a bank or third-party provider that outlines your rights and duties in accepting cards.
Let’s go through the steps of what happens when you swipe a credit or debit card or process an online payment. Before you can receive a payment, your customer’s card information must be verified and authorized for sufficient funds. This is the authorization process. Authorization requires a chain of communication involving five parties:
1-The cardholder.
2-You, the merchant.
3- Your merchant account (established with a bank or a third-party card processor, known as the “acquirer”).
4- A card network (VISA, MasterCard, American Express, Discover, etc.).
5- The bank that issued your customer’s card (known as the “issuer”).
Communication between these parties takes place every time you process a card payment. Think of a credit card processor as the bridge between you and your customers’ cash stash.
The next step of the process is the settlement process. How do you get paid for your transactions? Here is how it works:
Batching: All card based sales for the day are sent in a “batch” to the merchant account provider at the end of day. If you use an online payment gateway, this may happen automatically. With a POS or a terminal, you may have to initiate the process.
Ultimately, once a batch clears and fees are deducted by the acquirer, the remaining funds are transferred into your checking account.