subject: Credit Card Processing Basics: Making it Easy for your Customers to Pay [print this page] Credit Card Processing Basics: Making it Easy for your Customers to Pay
Modern payment solutions are all about comfort and convenience. Shoppers expect to be able to use a number of different options at the register. In recent years, however, two forms of payment have outstripped the rest. According to a recent survey, six out of ten retail purchases are made with a credit or debit card. When we take the same survey online the proportion increases to over nine out of ten purchases.
Why do Customers Prefer Plastic?
Credit cards have long been a popular choice for people who want to make large purchases and spend money they might not have immediate access to. In a simple terms, it allows them to enjoy today something that they must pay for tomorrow. Market research tells us that instant gratification is the motivating factor behind impulse buys. More often than not, a person treats themselves to a luxury item that they may not be able to afford and worries about it later.
As you might expect, this kind of spending had lead to an astonishing rise in credit card debt over the past decade. Because consumers cannot afford to keep borrowing money from banks, they have turned to a relatively new form of payment that is just as convenient as a credit card. A debit card looks exactly like a credit card, but instead of borrowing money from a bank, it simply deducts funds directly from the customer's checking account, which means there is no borrowing and the customer is not charged an interest rate.
Since it does not charge customers usurious interest rates and it can be used on the internet, unlike cash and checks, the debit card is arguably the most convenient modern payment option. Perhaps that is why it is the most popular payment option in the United States. For the first time ever, debit card payments surpassed credit card payments in 2009. Why is this?
In response to the recession, consumers are saving more and borrowing less. Credit card purchases have fallen by almost thirty percent over the last year, while debit card purchases have risen by about as much. Americans seems to have finally discovered that credit card debt cannot be sustained for a protracted period of time, particularly when the economy has entered a period of low growth.
What Does this Mean for Businesses?
They must offer credit and debit card payment options. Since both are processed using the same equipment and software, there is no need to choose one or the other. While the popularity of credit cards may be declining, the overall use of plastic is on the rise. As we mentioned earlier, sixty percent of all retail transactions and the overwhelming majority of online sales are completed with a debit or credit card. It all starts with a merchant service account.
What is it? Any business that wants to process plastic transactions must obtain a merchant service account at a bank or authorized financial institution. These service providers are responsible for verifying every single credit or debit card purchase your company processes. First, that will check to see that the account is valid. If it is, they will approve the transaction. Next, they will send an electronic copy of the bill to the customer's credit/debit card company. The company will then remit said funds to the service provider who will then transfer them to the merchant less a variable service fee. The entire process takes between two and three days.
What to look for?
Choosing a merchant service account is one of the most important decisions for any new or established business. The reason for this is simple: different providers charge at different rates. Ergo, choosing the wrong provider could be disastrous. As a general rule, the best provider is one that can meet the needs of his clients with fees and rates that are designed for certain business models. For example, a business that sells mostly inexpensively products will need a different type of service account than one that focuses on mostly big ticket items.
Basic Fees
Every company that obtains a merchant service account must pay a transaction fee. These fees are typically a percentage of the total sales. However, a company may be offered lower transaction fees if they agree to pay a higher monthly fee. Again, this only makes sense if a company sells a lot of inexpensive products, i.e., they have a high monthly sales volume. On the other hand, if the business sells computers and they have a low monthly sales volume it makes sense for them to agree to slightly higher transaction fees if they can negotiate lower monthly fees.
Do the Math
In the end, choosing the right merchant service provider is a numbers game. A business owner should always do a best case/worst case graph and compare several potential providers. The one that offers the lowest total fees and the best customer service is often the best choice.
