Today, businesses accepting credit cards are common because they are convenient and secure and provide systems that allow more businesses to start up and flourish. That’s why over 190 million customers in the U.S. carry a credit card[1].
However, there are some caveats to accepting credit cards, particularly if you’re a business that isn’t partnered with a proper merchant credit card processing service.
In this blog, Payment Nerds will briefly discuss the details of credit card processing along with the benefits and challenges businesses face when accepting credit card payments. Let’s dive right into it.
How Merchant Credit Card Processing Works
Businesses need merchant processing services like Payment Nerds to process electronic payments, including credit and debit card payments.
Merchant processors link each business to networks that make up the payment processing system and provide them with the means to accept payments online or in their physical store.
Below, we review the essential aspects and key figures vital to merchant credit card processing.
The Key Elements in Credit Card Payments
- Merchant: The business that accepts a debit or credit card payment.
- Cardholder/Customer: The individual who pays a business for their goods or services using their debit or credit card.
- Payment Processor: A company that helps process payments by managing the transactions between merchants, card networks, and banks. This is also known as a merchant services provider.
- Issuing Bank: The customer’s bank. More specifically, the bank that issued them the credit or debit card they use within a given transaction.
- Acquiring Bank: The merchant’s bank, or rather, the bank holding the merchant account that receives funds from all debit and credit card transactions before being transferred to the merchant’s main bank account.
- Merchant Account: A bank account for holding customers’ electronic payment funds before they are processed and transferred to a business’s official bank account. These are often provided by either payment processors or acquiring banks.
- Card Network: The credit card company that is connected through the issuing bank, which facilitates communication between banks and authorizes card transactions. These include familiar companies like Visa or Mastercard.
How Credit Card Payments Work
Now that we know the main parties involved in processing credit card transactions, let’s go through the steps of how they process credit card payments:
- A customer begins the process by making a purchase from a merchant who can accept credit cards via a payment gateway on their website or a point-of-sale in their store.
- The merchant’s payment processor sends the customer’s payment info to the card network, which then sends the same details to the customer’s issuing bank.
- The issuing bank validates the customer as a cardholder and checks if they have sufficient credit or debit funds. They then send an approval or denial to the network.
- The network sends the issuing bank’s response back to the payment processor, who then sends it to the merchant’s point of sale, virtual terminal, or payment gateway.
- The customer’s purchase is approved, and they receive their goods or services.
- At the end of a business day or at another time, the merchant sends all approved transactions to their payment processor, who then clears them by the card networks.
- The card networks receive funds from the issuing bank for these transactions and then send them to the merchant’s acquiring bank.
- At the acquiring bank, the money from the approved transactions is placed in a merchant account until the merchant transfers it to their primary bank account.
From the customer’s purchase to funds reaching your merchant account, this process can take one to several business days to complete. Though it may be complicated, every step ensures your business can perform secure transactions.
If you’re interested in working with a merchant services provider offering extensive payment processing solutions for your business, reach out to Payment Nerds.
Benefits for Businesses That Accept Payments With Credit Cards
Now that we’ve gone over what goes into the credit card payment process let’s talk about what accepting credit card payments can mean for a business. Aside from allowing you to accept another method of payment, your business experiences a number of direct and indirect benefits for taking credit card transactions, such as:
It Adds Trust & Credibility
Similar to highlighting recent industry awards or glowing customer testimonials, showcasing the logos of trusted credit card brands near your point of sale system indicates you’re a trustworthy business[2].
After all, payment processors and card networks have very strict rules about who they will work with. So, if your business has been approved to accept payments through their system, it has proven its legitimacy and trust!
It Keeps Payments Secure Between Merchant & Customer
With the right merchant credit card processing service, you and your customers are more likely to conduct safe, fraud-free transactions[2]. Merchant processing services often include security measures like encryption or tokenization of sensitive cardholder data.
They may also provide fraud prevention support, monitor transactions for discrepancies, and ensure that no malicious actors use a valid cardholder’s information.
It Expands the Customer Base
Accepting credit cards also means your business can expand its customer base[2]. The right processor can provide an array of effective payment solutions, including integrated payment gateways for your eCommerce website and efficient POS systems that ensure customers enjoy quick, easy checkouts.
With Payment Nerds, you can process payments from within the U.S. and many foreign countries, allowing for near-limitless expansion in your customer base.
The Challenges of Accepting Credit Cards
Every pro has a con that goes along with it, even in merchant credit card processing. Here are a few challenges most merchants face when setting themselves up to accept credit cards:
Paying Numerous Fees
In order to cover the costs of preserving their payment process infrastructure, card networks and payment processors charge numerous transaction and interchange fees. These are taken out of each customer payment you have processed, leading to your losing a significant portion of profits, depending on how your pricing structure works[3].
Risk of Chargebacks & Fraud
Accepting credit cards also increases the likelihood of customers requesting chargebacks or instances of fraud. This is often due to the digital and online nature of card payments, which usually involve mistaken or unintended purchases, like automatic subscription renewals.
It also means malicious hackers can potentially find vulnerabilities within a website or even a physical POS system, allowing them to access personal payment information.
Reserved Payments for High-Risk Merchants
High-risk merchants will also face more significant challenges when accepting payments because they work in industries that are subject to greater scrutiny from law enforcement institutions and regulatory organizations.
One particular challenge is reserved payments, which are customer payment funds withheld by merchant processing services or acquiring banks. These funds are held in reserve for a certain amount of time in case of potential customer chargebacks. This slows down cash flow and makes it difficult for high-risk merchants to make a profit[4].
Conclusion
Accepting credit cards is an enormously vital part of how businesses work today. Despite how complex credit card transactions can be, they also ensure your business enjoys many customers, more secure payments, and an excellent form of trust and credibility for customers to recognize.
However, credit card payments also mean risking higher chances of fraud and customer chargebacks, as well as high processing fees, especially if you’re a merchant in the tobacco or gun industry, for example.
To get the best experience in accepting credit cards, partner with Payment Nerds. We’re a merchant processing company that offers fair, transparent fees, highly secure payment processing, and 24/7 customer support. Contact us and learn more about our payment processing solutions today!
Sources
- [1] NerdWallet. “Credit Card Data, Statistics and Research.” Accessed November 4, 2024.
- [2] Forbes. “Accepting Credit Cards: Why It’s Worth It.”
- [3] Business.com. “Time to Ditch Cash? Why Credit Card Only Might Make Sense.” Accessed November 4, 2024.
- [4] NerdWallet. “What Is a High-Risk Merchant Account?” Accessed November 4, 2024.