What Are Credit Card Processors?

You have probably heard the expression that in business, cash is king. However, times are changing. Now that we are in the third decade of a new millennium, more and more people are switching to using plastic money such as making payments using credit cards instead of cash. Credit cards eliminate the need for carrying large sums of money which is not only risky but can also be very inconvenient. In this article, you’ll understand what are credit card processors.

If you run a small business, there is no doubt that once you start accepting credit cards you will boost sales, reduce the risk of getting bad checks, legitimize your business and generally improve the outlook of your business. In order to accept credit cards for payment, you will need to work with top credit card processors to help you with your transactions both online and in person. A credit card processor will be an important business partner when it comes to the core service of processing payments.

However, choosing a credit card processor can be an overwhelming and expensive experience. There are more than 1000 credit processing companies to choose from and each company claims to be the best. But how do you pick the right processing solution for your business? Well, you may not need to become an expert in credit card processes but you will be a better consumer if you actually understand how credit card processing works. 

What Are Credit Card Processors and How Do They Work? 

Credit card processors are companies that allow businesses whether big or small to safely and securely receive payments in person, over the phone, or online using seamless integration.  

In order to understand how credit card processors work, it is very important to first look at all the actors and their roles. Here are 5 key players that are involved in the process of authorization and settlement. 

1.    The Cardholder

If you own a credit card, you are a cardholder. A cardholder is an individual who obtains a credit card from the issuing bank and presents it to a business when paying for goods and services. 

2.    Merchant

A merchant is a business that sells goods and services. In this context, a merchant is a business that has a merchant account that allows them to accept credit card payments from cardholders once they purchase goods and services. 

3.    The Merchant Bank

A merchant bank is also known as an acquiring bank is a member of the card associations that is Visa or MasterCard. The merchant bank contracts with the merchants and maintains the merchant accounts for them so that they are able to accept both credit and business cards. Merchant banks are responsible for providing merchants with both the equipment and software needed to handle card payments. 

4.    The Payment Processors

Payment processors are the companies that process credit card transactions. They connect the merchants, acquiring banks, card networks, and other shareholders responsible for making credit card payments possible. 

5.    Card Associations

The card associations include companies such as Visa, American Express, Discover, and MasterCard. The card associations are responsible for setting the guidelines and interchange rates and they also act as the arbiter between the merchant banks and the issuing banks. 

How Does Credit Card Processing Work? 

When your customer purchases an item from your store using a credit card. The credit card is swiped on a processing terminal where it’s recognized for charging. 

Your customers can also tap contactless cards. Or use digital wallets like the Apple Pay mobile to make a payment with their smartphone. For online customers, simply log in to a website or app and present their credit card for payment. Using a secure credit card processing gateway. 

Once the customer’s payment appears at the merchant shop, the payment information goes to the card processor. The processor then proceeds to convey this information to the customer’s bank through the card associations such as MasterCard. The customer’s bank can approve or deny the payment. Approval depends on several factors such as available funds, credit card validity among other factors. 

The approved transaction is then sent to the payment processor and finally to the credit cardholder. All approved transactions are grouped together for settlement at the close of business every day. Customers’ accounts are charged for the transactions and deposits are later made into your merchant bank account.  

How to Choose the Right Payment Processor?

When it comes to choosing a credit card processor. The first thing you need to do is to determine what you need from the processor. Do your research and learn more about each and every product the processor of your choice offers. Make sure that you factor in fees, rates, and all the fine prints on the agreement. Read online reviews and also network with other merchant owners. Finally, who use credit card processors so that they can share with you important information.