As a consumer, using a credit or debit card to buy an item at the store or a tank of gas might seem like a simple transaction. On the other side of the register, it’s a different story. For businesses that process card transactions, reliability, efficiency and affordability are all paramount to the bottom line. The next installment in our Banking 101 series on financial basics covers Credit & Debit Card Processing, also known as “Merchant Services,” and what you need to know.
Who plays a role in a card transaction?
Obviously, you have the cardholder and the merchant, plus each of their banks, which we will call the “issuing bank” (belonging to the cardholder) and the “merchant bank” (belonging to the merchant). The issuing bank is responsible for authorizing the transaction and for sending funds to the merchant bank if the transaction is approved. The issuing bank will then bill the cardholder monthly for their credit card purchases. Meanwhile, the merchant bank holds the account where funds are deposited following a purchase.
Then, you have the middleman – the payment processor. This can be a separate party or sometimes will be the merchant bank. Regardless, the payment processor ensures the funds are transferred from the issuing bank to the merchant bank. Often, the payment processor will offer the hardware or software used to accept cards, such as tap-to-pay terminals or other card-reading devices.
How does card processing work?
There are two stages to credit and debit card processing – authorization and settlement. If a debit card is used, both authorization and settlement happen in seconds with the money coming out of your checking account. If a credit card is used for payment, the account information is routed from the merchant bank by the payment processor to the issuing bank for approval. The issuing bank will either confirm or deny the transaction and the payment processor will deliver that back to the merchant bank and to the card reader.
Unlike the near instant settlement for a debit card, a credit card settlement can take 1-3 business days. This is the process of actually moving the funds from the issuing bank to the merchant bank. Typically, businesses send batches of transactions to their payment processor at a regularly scheduled time, like the close of a business day. The payment processor and the card networks (Visa, MasterCard, etc.) will work to ensure the funds are deposited into the correct account.
Why is card processing important?
To accept card payments, a merchant will need hardware and software, both of which could be provided by the payment processor. Regardless of whether it’s an entire point-of-sale system or just a simple card reader, these devices collect and send card data to the payment processor. In addition, a software app is often needed for processing. These programs can include features such as inventory management, reporting, analytics and the ability to send customers digital receipts.
Card processing also comes at a cost for the merchant, so it is important to find a merchant bank and payment processor that keeps processing fees affordable. Mabrey Bank partners with Basys, a payment processor, to ensure our merchant clients are not paying more than necessary for processing fees. Not all payment processors are created equal. For more information on how Basys securely handles your funds, click here.
If you would like to learn more about how Mabrey can help your business save money on your card processing fees, click here.