The Official Merchant Services Blog functions on the logical premise that our readers are interested in the topics we cover, most notably merchant services. We strive to bring you useful news, tips, and insight that can help you as both a merchant and a consumer. That means that sometimes we delve into complex topics, like our multipart series on Payment Gateways. And other times we tackle newsworthy topics, like Google+ being opened up for business pages.

But today we’re going to get down to the basics and discuss the very heart of merchant services: Credit Card Processing. Credit cards, the plastic payment solution has become the most convenient form of payment for countless consumers. Why is it important for merchants to give their customers the option to pay with a credit card –– specifically on that merchant’s web site? Here are 10 of the top reasons we think credit card processing is an important option for merchants:

• Competitive Advantage: If your business has the most options and the most flexible payment systems, you have an edge over your competition.
• More Sales: Data collected on consumers shows that credit card owners buy 25 times more merchandise than customers who pay cash.
• Cashless Society: We’re not there yet, but the trend in online shopping and electronic payment systems indicates that credit card and debit card processing are quickly becoming the preferred methods of payment. This will take center stage in business news next week when Black Friday goes right up against Cyber Monday.
• Convenience: One of the primary reasons credit and debit card transactions are becoming so popular is because buying goods online with just a few mouse clicks is extremely convenient to consumers.
• Impulse Sales: Credit Cards give customers the freedom to buy on impulse, spending money on previously unplanned merchandise. Cash is finite and in the pocket. But plastic lets customers reach beyond what they have in hand.
• Enhanced Advertising: Customers are more likely to shop at businesses that accept their credit card. As such, they tend to look for and read ads from businesses that accept their credit cards first over other ads.
• Steadier Sales: Credit Card business has less peaks. Cash using consumers buy heavily on payday and just before holidays, but credit card using consumers make purchases whenever they need to.
• Larger Volume: Accepting credit cards helps merchants attain higher unit sales and extra orders.
• More Expensive Merchandise: Credit card customers are sometimes less conscious of slight price differences. They are more likely to spend a bit extra at a merchant simply because they accept their form of payment instead of seeking out wholesalers or discounters who do not accept their credit card.

We’re interested in your feedback. What other reasons would you add to this list?

Tips and Terms

Revenues generated by credit card use are fast approaching the $200 billion mark. Your business can benefit  by offering credit card payment processing. To understand the process better, we’re going to define some of the important terms involved in credit card processing and give some insight into how it all works:

Acquirer – a bank, which is often a 3rd party provider, who processes and settles merchant credit card payments.  This can be a bank providing your merchant account or a service that provides it to your processing company.  The acquirer works with the credit card issuer.

Authorization – is the first step that happens after the credit card is swiped.  The purchase and card information are sent to the acquirer who, in turn, sends the same information to the credit card issuer.  The credit card issuer then accepts or declines the transaction.  If accepted, an authorization code is generated and the purchase transaction is continues to the next step, namely: batching.

Batching – is the review process done by a merchant on all credit card transactions for the business day.  The review process involves ensuring all credit card transactions are authorized and signed by the cardholder.  After the review process, the merchant sends the information as a batch to the acquirer to receive clearing for payment.

Cardholder – he is the customer as specified on the credit card, the customer so to speak.

Card network – these are networks that act as an intermediary between the acquirer and the issuer.  Card networks transfer the information originating from the acquirer to the issuer about the purchase.  This happens in the authorization process.

Clearing – the third step in the payment process which happens after the acquirer sends the batch information through the card network to the issuing bank.  The card network acts as a router depending on the credit card issuer found on the purchase detail.  This process permits revenues for both the issuing bank and the card network called the interchange fee.  After deduction of interchange fees, the issuing bank sends the information back to the acquirer through the same card network used.

Discount fee – this fee is paid for by merchants to the acquirer to cover processing costs.

Funding – the fourth step in the credit card payment process.  This involves the acquirer sending back the transaction information to the merchant less the discount fee.  The merchant receives the remainder of the payment and is now considered paid.  This generates the cardholder’s billing statement and accounts are funded appropriately.

Interchange fee – the fee charged by card networks and card issuers to the merchants.  This fee is regulated to about 1 to 3 percent of the total purchase amount and covers the costs associated with credit card acceptance.

Issuer – the financial institution who issues credit card products to its customers.  Examples of major issuers include Discover, Amex, Visa and Mastercard.

A Step By Step Guide

And finally, to get an easy to read visual guide on how Credit Card Processing works, please visit the Host Merchant Services article archive here:

How Credit Card Processing Works