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How Do Credit Card Companies Pay Merchants

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Personal & Business Credit Cards : How to Become a Credit Card Merchant

Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.

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  • Credit card companies are in the business of making money, yet they often advertise incentives that feature rewards such as cash back on credit card purchases. Many consumers are inundated with online offers and mailers, promising great incentives, from zero to low introductory interest rates to one-time bonus rewards offers, to cash back deals whenever they use their cards.

    Nowadays, it isn’t unusual to see banks offer what seem to be very generous cash back incentives to their cardholders, even after the introductory bonus period is over. For example, Chase offers up to 5% cash back on its Chase Freedom Rewards Card, as does the Discover Card. So how can these companies offer such seemingly lucrative deals for consumers and still make a profit?

    What To Do In A Fraud Case

    In the event that a merchant feels that fraud is being committed in-store, the first step is always to call the card issuer and ask for the Code 10 authorization. This will help to avoid putting through a fraudulent transaction. If, however, the operation has gone through and the merchant is suspicious after the fact, it is advised by all of the card issuers that the fraudulent payment is reported immediately.

    The true card owner the person whose information was stolen has 60 days from the payment to dispute it. Therefore, merchants should have their own checks in place to look for suspicious transactions and catch them ahead of time. It is always best to be proactive, rather than reactive in these cases.

    For merchants, the best process is to have open lines of communication with all of the correct parties. Contact the card issuer, refer to the issuer guidelines to make sure all appropriate steps have been taken, contact the authorities if appropriate, and be available to provide any information to help the case to be resolved as quickly as possible.

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    What Is Merchant Processing

    Merchant processing is simply the ability for a business to accept credit and debit card payments in a secure way. E-checks and ACH transactions also fall under merchant processing, too.

    The common thread between these categories is security. All of these transactions, whether online or offline, have to happen over a secure connection. An insecure transaction can lead to fraud because sensitive credit card information is exposed.

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    What Determines Your Interchange Fees

    With each payment network, there are several factors that affect where your interchange fees fall within the ranges above. Here are the most significant:

    • Merchant category: Every merchant has a merchant category code corresponding to its business type. Payment networks charge different interchange fees based on the business’s MCC. For example, a supermarket has different fees than a restaurant.
    • Type of credit card used: Networks have various types of cards with their own sets of benefits. Cards that offer more benefits, such as travel rewards or purchase protections, usually have higher interchange fees. A World Elite Mastercard will tend to have higher interchange fees than an Elite Mastercard, a Visa Signature Preferred Card usually has higher fees than a Visa Signature Card, and so on.
    • Processing method: Interchange fees can change based on whether the card was swiped/inserted , keyed in, or not present . This is in part because the risk of fraud varies based on the processing method. Card-not-present transactions carry a higher risk of fraud and/or chargebacks, and interchange fees are often higher on these transactions.

    American Express also uses transaction amounts to determine its interchange fees, with higher-value transactions costing merchants less.

    A Guide To Understanding Credit Card Processing

    What to Expect from Credit Card Merchant Processing

    How important are credit card sales to your business’s growth? Our credit card processing guide will help you understand how to accept credit cards and what to look for in a credit card processor.

    By: Dawn Allcot, Contributor

    Accepting credit and debit payments comes with a cost, but its most likely a cost you cant afford to skip. Research your options to get the best deal for you and your customers.

    How important are credit card sales to your companys growth? Our credit card processing guide will help you understand how to accept credit cards and what to look for in a credit card processor. It will also cover credit card processing guidelines and procedures you should understand for security and compliance reasons.

    To help you understand credit card processing, this guide will:

    • Examine the growth of credit card use in the United States.
    • Walk you through the credit card processing process.
    • Showcase the various ways you can accept credit cards, either at the point-of-sale or through online transactions.
    • Discuss security concerns and credit card processing tips for accepting digital payments.
    • Cover what questions to ask merchant credit card processors before you choose a company.

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    The Different Types Of Credit Card Companies

    To a cardholder, making a credit card purchase seems like a simple process. You swipe, tap, or insert your card in the terminal. Then, like magic, a few seconds later you’re on your way.

    In reality, there’s a lot that happens behind the scenes in those few seconds — and long after you leave. Other than you, the cardholder, and the merchant, there are three main players in the credit card game.

    What Are The Lowest Credit Card Merchant Fees

    Of the credit card payment networks, Visa tends to have the lowest fees, although Mastercard and Discover are similar. Once you add in the payment processor fees, your total merchant credit card fees are likely to be close regardless of whether the customer uses a Visa, Mastercard or Discover.

    Itâs only American Express users who may make your costs creep up, although even they have lowered their fees in recent years to be more in line with the others. The place where you can really lower your costs are in choosing your payment processor.

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    Consumers Will Pay Those Processing Fees Critics Say

    Only an extremely narrow segment of merchants with a small overall transaction volume might benefit from the new fee structure, critics say. The bulk of retailers will see increased costs, which will trickle down to consumers already struggling to make ends meet amid the highest inflation in 40 years.

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    Merchants and American consumers are not fooled by such bait-and-switches, wrote Democratic senator Dick Durbin of Illinois in a letter to the heads of Visa and Mastercard last week asking them to call off fee hikes. The letter was also signed by Republican senator Roger Marshall of Kansas, and U.S. representatives Democrat Peter Welch of Vermont and Republican Beth Van Duyne of Texas. Your profits are already high enough and any further fee increase is simply taking advantage of vulnerable Americans.

    Visa responded late Friday in a letter defending its rate tweaks. It noted more than 838,000 small U.S. businesses would benefit from a drop in fees and that monies from increases would go towards making card transactions more secure.

    “As more commerce moved online during the pandemic, so did fraud,” it said.

    Who Determines Average Merchant Processing Fees

    “Why Does Merchant Services Exist” – Introduction to Credit Card Processing (Part 3)

    Merchant processing fees are typically determined by three parties card issuers , credit card networks, and payment processors.

    Card issuers, card networks, and payment processors play a significant role in determining merchant processing fees due to their active involvement in the credit card transaction process.

    To understand how all three entities determine credit card processing fees, you must first understand the nature of each organization:

    • Credit card networks include Visa, Mastercard, Discover, American Express, and other card brands.
    • Card issuers: Card issuers are banks or financial institutions that partner with card networks to issue credit cards to consumers.
    • Payment processors: Payment processors act as mediators between merchants and their banks and provide payment gateways to complete credit or debit card transactions.

    All parties determine the average merchant processing fees because they charge a credit card fee per transaction which ultimately dictates how much a merchant will have to pay.

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    The Cost Of Accepting Credit Card Payments

    When your business processes credit card payments, there will be multiple fees taken out of the total transaction amount. The non-negotiable credit card network fees can vary:

    • From 1.15% + $0.05 to 2.50% + $0.10 in interchange fees, although this could be as high as 3.30% + $0.10 if the client uses an American Express card.
    • From 0.13% to 0.15% in assessment fees.

    The most important factors in what your business pays will be its MCC and the type of credit card the customer uses.

    Next, your payment processor will take its cut, unless you’ve chosen a processor that charges one flat rate to cover all the fees in the transaction.

    With credit cards growing more and more popular, the typical merchant doesn’t have much of a choice but to pay these fees to the card issuer and payment processor. By knowing how much you’ll pay on each transaction, you can price your products appropriately and ensure you’re making enough money on each sale.

    Some businesses also charge a credit card convenience fee to cover the cost of the processing fees above.

    How Credit Card Companies Profit From Merchants

    Have you ever tried to purchase something at a business that didn’t accept a certain type of credit card, like American Express or Discover? These and other credit card networks charge merchants fees to process card transactions, so some merchants opt to only accept cards in certain networks. These fees vary by network, but are typically between 1% and 3%.

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    Why Do You Need To Know About Credit Card Processing

    While its not necessary for cardholders to know every detail about credit card processing, its helpful to know whats going on behind the scenes to better understand what could go wrong.

    Acquiring banks and card networks charge merchants a fee for each credit card transaction. Because of this, merchants may require a minimum charge if a customer wishes to use a credit card to make a purchase. Merchants may also mark up the cost of goods or services to make up for credit card processing fees .

    In some states, laws prohibit merchants from passing credit card processing fees directly to customers. Additionally, it doesnt make sense for many merchants to go through the extra effort of adding charges for using a credit card.

    Some merchants combat fees by going the cash only route. Youve probably even seen this common signage near the register of some farmers market stalls, restaurants, stores or other services.

    What Does Your Processing Fee Cover

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    Your processing fee covers several administrative costs, including account and software charges. You will also pay transaction fees and one-time incidental fees, like chargebacks. The transaction fees always are the largest part of the total and they are charged every time you do a transaction. Most transaction fees can be divided into two categories., based on whether they take place in person or otherwise

    In-person transaction fees are charged when a newspaper vendor has their customers swipe their card or when a tailor or farmer allows their customer to pay in person by using a card. The fees for this type of transaction are between 1.5% and 2.9%, so if a customer purchases goods worth $100 from you, you can expect to pay up to $2.90 as your transaction fee.

    If the card is not present, your transaction is thought of as having a higher risk of chargebacks and fraud. For this reason, you will pay between 2.9% and 3.5% on average. Transactions that are keyed in manually are included in these transactions, as invoices. Online purchases of any size are in this category, so if you have an online store, youll pay up to $3.50 in transaction fees on a transaction of $100.

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    How A Credit Card Is Processed

    Because credit cards are now a common form of payment, most people are familiar with how to use one. But what steps does that payment go through to get those funds where they need to go?

    Here are the key players involved in processing a credit card transaction, and the steps of that credit card transaction, from start to finish.

    Ies Involved In A Credit Card Transaction

  • Card Holder and Merchant
  • Issuing Bank: The entity which issues the Credit Card to Customer, like HDFC Bank, YES Bank, Citibank, etc. It extends a line of credit to the consumer. Liability for non-payment is then shared by the issuing bank and the acquiring bank, according to rules established by the card association brand.
  • Acquiring Bank: It is responsible for making payments to the merchant. They deal with merchants requests them to accept their card.
  • Payment Network: Networks like Visa, MasterCard, American Express serve as the link between acquiring banks and issuing banks. These banks have relationships with a network, rather than with each other, for fulfilling card purchases. This allows a card issued by say ICICI Bank in India to be used at a shop in Japan, for instance, without requiring the banks to have a direct relationship with each other.
  • American Express is acquirer, issuer as well as has its own network. Banks can use each others network if an agreement is reached.

    When you use a credit card, money moves electronically through many hands, from the issuer, through the network, to the merchants bank. The network also makes sure that the transaction is attributed to the proper cardholder you so that your issuer can bill you.

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    Virtual Processing: How To Accept Credit Cards Online

    • A payment gatewayThis enables you to authorize transactions. You can find a payment gateway with a service such as or Sage.

    • A readymade store platformIf you’re selling goods, consider setting up on a platform that allows you to accept payments as part of the format. Sites such as Etsy, eBay and Shopify are good examples.

    • Combo payment gateway and merchant accountYou can set this up with a company like PayPal or Stripe, and it may involve fewer fees than setting up a merchant account separately, depending on the size of your business.

    What Type Of Support Is Offered

    What Are The Average Credit Card Processing Fees That Merchants Pay?

    When your payments hit a snag, will the processor be there to support you until youre back up and running? Further, an automated phone system isnt the same as speaking to a live person, so make sure to ask if they have live customer support. Low rate processing fees dont mean much if you cant reach someone to help when you need it most.

    BigCommerce Payment Processing Partners

    BigCommerce offers multiple payment gateways so you can choose which is right for your business. Learn more about the most commonly used:

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    Income From Credit Card Interest And Merchant Fees

    The primary way that banks make money is interest from credit card accounts. When a cardholder fails to repay their entire balance in a given month, interest fees are charged to the account. For any given account, the interest charged is equal to the card’s periodic rate multiplied by the average daily balance and number of days in a billing period. The periodic rate is the annual percentage rate divided by 365. In the United States, the average credit card interest rate paid by interest-bearing accounts is 19.33%.

    The second largest source of income for credit card companies are fees collected from merchants. When a retailer accepts a credit card payment, a percentage of the sale goes to the card’s issuing bank. This is commonly referred to as the interchange rate, which will vary from card to card and retailer to retailer.

    The table below shows the year-to-date credit card income for five banks. This information is self-reported by banks from 2019 annual report data.


    The Cfib Lobbies For Change

    The Canadian Federation of Independent Business started its campaign against the high cost of Canadian credit card transaction fees in November 2008 and was instrumental in developing the Code of Conduct for the Credit and Debit Card Industry in Canada which came into effect August 17, 2010.

    However, although having a Code which both MasterCard and Visa voluntarily agreed to follow was a good thing, the problem of the massive fees charged on premium credit card transactions remained, and the CFIB continued to lobby, pushing for amendments to the Code that would:

    • allow merchants to accept lower-cost cards from one brand without the requirement to accept higher cost ‘premium’ cards or to surcharge for accepting higher cost cards.
    • have all higher cost credit cards to be required to be separately branded as ‘premium’ as most consumers still do not know that some credit cards charge extra fees for merchants.
    • add rules about mobile payments and issues related to processors.

    In 2012 the Competition Bureau of Canada took Visa and MasterCard to court over surcharging and honor-all-cards rules.

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    How To Protect Yourself: Credit Card Surcharges

    When you use a credit card to pay for goods or services the merchant is charged a fee by the credit card company. These interchange fees, also called swipe fees, are often calculated as a percentage of the amount you purchase. Some merchants may choose to recoup these fees by adding a surcharge to your purchase.

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