Credit card processing - simplified

A business can no longer afford not to offer its customers multiple payment options. Credit and debit cards are fast becoming the most common payment mode of big purchasers; pushing more and more businesses towards credit card processing services.

There are many credit card processing services in the market, and without some knowledge of this trade, you can easily make the wrong choice. In this guide, we attempt to address the most common questions merchants have about credit card processing, such as:

  • What is credit card processing?
  • Why is credit card processing a critical element of businesses today?
  • What are the types of credit card processors?
  • How should you select a credit card processing company?
  • What makes a business high risk?
  • What is needed to qualify for a merchant account?
  • How much does a credit card processing service cost?
  • Terminology

What is credit card processing?

A credit card transaction starts with a swipe at a credit card terminal or by the entry of the card details (card-less transaction) into a billing system. Before the amount moves from the card holder's account into your business account, certain validations, checks and deductions are made. All these tasks are managed by the credit card processor.

Credit card processing companies make sure credit card transactions are processed accurately and on time, for a fee. The fine points of credit card processing can get confusing, and businesses save themselves the bother by hiring a processor. In fact, internet businesses rely on credit card processing companies totally for their every day functioning.

Why is credit card processing a critical element of businesses today?

It is critical for growing businesses to offer customers the option to pay with credit cards. As more and more customers get comfortable with cashless transactions, businesses are pulling all the stops to make credit card transactions secure and painless. Online transactions (cardless) are quite common today with the surge in e-commerce websites.

Cashless transactions benefit your business. Funds are transferred into your merchant account on time with hardly any effort from your side. You also open your doors to a new segment of customers - a definite plus point for every business.

Credit card companies and banks encourage credit card usage by offering deals such as heavy discounts on products and services, gift vouchers, and prepaid services. Businesses can add their own incentives to existing offers to make credit card purchases irresistible to customers.

What are the types of credit card processors?

There are a variety of credit card processors to choose from. These are discussed below.

Independent Sales Organizations (ISO)

ISO services are like brokers. They link merchants with banks. ISOs have a contract with a bank to sell services to them. They hike the merchant service fees when negotiating with the merchant and close the deal. This is how they make profit. ISOs are popular as they take care of all the details for the merchant.


Enquire about merchant account services at your existing bank. Some banks offer merchant account services as part of a business account deal. Understand that most banks will outsource credit card processing to an external agency as they may not have the expertise to handle it in-house.

Credit card companies

The major credit card companies - Visa, MasterCard, American Express and Discover - have their own rules for servicing merchant accounts. While American Express sets up your merchant account directly, the other three brands expect you to have an account with an intermediary organization before setting you up for credit card processing. Large businesses that see monthly credit card sales in hundreds of millions usually take up this credit card processing option.

International merchant account companies

Businesses can opt to get their credit card processing done by offshore or international merchant account providers. As these merchant account companies are not regulated in the same way as those in the United States, they are risky. Typically, businesses that have poor credit history, are placed at odd locations, involve huge risks or have been refused credit card processing services by conventional agencies go for this option.

Registered credit card broker

These brokers are also independent sales organizations representing several ISO processors at one time. They have accounts with other credit card processing companies. Their services are personalized and they offer small businesses the same level of service provided to larger concerns. All organizations should be registered with Visa and MasterCard sponsored by ISOs. Small and mid-sized business can opt for this more expensive option if they want custom-made services.

How should you select a credit card processing company?

Keep the following points in mind in your selection of a credit card processing company. There are many important factors that are best checked out at the start of a business relationship.

  1. Survey the market
  2. Do a market analysis of various credit card processing companies. Compare services on the basis of:

    • length of service
    • rates charged
    • terms and conditions applied to the merchant account
    • previous record
    • specialization
    • familiarity with your business type, size and sales volume
  3. Understand the fee structure
  4. Credit card processors charge a number of fees annually, monthly, or one time. You should understand all the fees so there are no rude surprises when you get the bill from the company.

  5. Know the time to receiving funds
  6. Swiping a card takes seconds. It takes much longer for the funds to reach your merchant account. Transactions are processed in batches. The industry standard for transferring funds to the business account is 2 business days. This varies across credit card companies. American Express delivers funds in 2-30 days.

  7. Read the fine print
  8. Many businesses make the mistake of not asking enough questions about the terms and conditions set down in the contract. Make sure the credit card processor cannot take advantage of any clause to fleece you. It's best to have your business lawyer review the contract before signing it.

  9. Assess the customer service
  10. You will be contacting the credit card processing company's customer support service often, at least initially. In case of any problems during a credit card transaction, it should be possible to get immediate assistance or you will lose a sale. Always get some contact names and numbers so that you don't waste time in customer call queues when help is required urgently. Know the working hours of customer service personnel. A 24x7 service is best.

    The credit card processor should understand the importance of customer care and offer you some guarantees such as response time, query resolution, etc. Ask about the knowledge levels of its representatives.

  11. Security of transactions
  12. Reputed credit card processing companies work with you to mitigate credit card fraud. They make card less transactions safer by using Secure Socket Layer (SSL) protocol for transmitting credit card information on the internet. This is the minimum security required for online credit card processing transactions.

  13. Get references

Ask the credit card processor for references. Call past customers and get reviews of the processors' services, customer care, security provisions, error rates, lapses, etc. At a minimum, check the processor's rating with the Better Business Bureau. If there are any complaints or recorded disputes, question the credit card processor. If their replies are not satisfactory, keep looking around.

What makes a business high risk?

This question is discussed here because a high risk business pays higher than average for credit card processing services. Some factors that make a business a high credit risk include:

  • poor credit history
  • type of business
  • high volume of chargebacks (indicative of customer dissatisfaction)
  • potential of credit card fraud (high in businesses such as adult websites)
  • money-back guarantees

Good credit card processing companies specializing in internet transactions help high risk businesses reduce credit card fraud and repeated chargebacks to some extent. Credit card fraud is the biggest risk in credit card transactions. Credit cards are stolen and used to make large purchases, often leading to heavy losses for the credit card processing service and the business.

High risk businesses are charged higher processing fees. They may also need to build a reserve with the credit card processor to serve as a buffer. A high risk business has to bear this cost to avail credit card processing services.

What is needed to qualify for a merchant account?

All merchant account and credit card processing services will perform a thorough background check before accepting your application. This is mandated by law after 9-11 to prevent money laundering. The processor will:

  • check your credit history
  • verify your business is not prone to large volume of chargebacks (because of credit card fraud or a mistake by your ISO)
  • ask for credit references from your suppliers (to vouch for your name)
  • reference from previous credit card processor (if any)
  • past statements to check credit history and chargebacks

If your business falls into the high credit risk category, you are not disqualified from approval. You will have to pay more than non-risky businesses but a good credit card processing company will help you reduce your risk by addressing specific problems with your credit. Do not be misled by companies that promise a 99% acceptance rate. Instead, look for companies that have a history of helping out businesses in your situation.

How much does a credit card processing service cost?

The cost of credit card processing is an important factor in selecting a merchant account service. You should consider the costs of equipment and the applicable processing fees.

Cost of equipment

The credit card terminal used to swipe cards is the biggest upfront investment. However, you can choose to lease a machine for as low as $20 a month if you are only planning to try out credit card processing. The cost of a new terminal varies with the sophistication and features included. Basic machines cost from $200 to $750; wireless models can go up to $1000. Depending on whether incorporating credit card processing is a short or long term plan, you can lease or purchase equipment. Many merchant account service companies include terminals in their business package.

Online businesses may not need terminals. They will have to purchase a virtual terminal program and payment gateway to process cardless credit card transactions on their computer.

If you accept credit card orders over the phone or mail, you need to enter credit card data manually. These options are risky as there is the possibility of the funds, verified at the time of sale, not being available at the time the charge is processed.

Processing fees

Al credit card processing services charge a discount fee. This is the percentage charged for each transaction processed by the company. Charges levied by the credit card processor will depend on:

  • your credit history
  • transaction amount
  • type of transaction - cardless or card present

The discount fee for transactions in which the card is present typically ranges from 1.5-2 percent. Cardless transactions incur a fee of 2.2-3 percent. Monthly minimum fees of around $20 are also common.

There are other charges, most of which are determined by the credit card companies such as Visa and MasterCard. A credit card processor may charge an application fee (non-refundable) that can range from $200 to $500. Some companies charge setup fees, activation fees, customer service fees, programming fees, pass-through fees and more. Make sure all the fees are specified in the contract.

You should shop around for the best deals. Be wary of providers that include a large upfront investment in the agreement. Many reputed credit card processors will not charge activation or setup fees. Their services will be reliable and the prices fair. Working with a trustworthy processor is more important than paying cheap transaction fees.


Some of the commonly used terminologies in the credit card processing industry are defined below:


The customer on whose name the credit or debit card is issued.


The credit card charge that has to be reversed to the customer as a result of a returned product or service.

Chargeback fee

The fee charged by the credit card processor to process the chargeback.

Contingent liability

When the customer's satisfaction demands the business' ability to perform a certain set of actions.

Gross settlement

The total transaction amount before the processing company makes any deductions. Deductions are typically processed at the end of the month or cycle.

Issuing bank

Bank that issues the card to the customer.

Magnetic transaction

Transactions that involve a card swipe in the POS (point-of-sale) terminal.

Merchant account holder

You are the owner of the merchant account. It is in your name and you are directly responsible for it.

Net settlement

The amount that is transferred to your business account after the processing company has deducted applicable fees.

Non-magnetic/cardless transaction

Credit card transactions that do not involve a swipe. Card details are taken on phone or email. These transactions are susceptible to fraud and are charged higher for their riskiness.

Pass-through fee

Fee charged by the credit card processor for transactions that could not be processed due to insufficient verification of information at your end.


Credit card processing companies build a reserve for high risk businesses. A predetermined percentage of each transaction is withheld by the processor for a specified time period in escrow to deal with high volume of chargebacks. The reserve does not span the length of an account that has shown stability for a certain period of time. The credit card processor will also verify the legitimacy of your business and its financial soundness to avoid loss due to fraud or bad debts.

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