Players, Payments and Pricing: What You Need to Know Before Choosing a Payments Provider

We’re not going to sugar-coat it: choosing the right payment processing for your business might be the toughest thing you encounter when setting up shop. To help make the decision process easier, and lead you down the path of making an informed and educated decision, you’ll need to get caught up on the three Ps of payment processing: players, payments and pricing.

Payment Provider Players

There are three main players when it comes to processing credit and debit card transactions — whether you sell online or in person. On one end is you, the business owner/merchant. On the other end is your customer. In between those factors are various technology solutions that connect the two of you.

1. You, the merchant: In order to accept card payments, you need to partner with a merchant bank (sometimes called an acquirer) who accepts payments on your behalf and deposits them into a merchant account that they provide.
2. Your customer: In order for your customer to buy (and pay for) your stuff, he or she needs a credit or debit card. The bank that approves your customer for the card (and lends him or her the cash to pay you) is called the issuing bank.
3. The technology: In the middle are two technologies that enable you and your customer to transact. The first is a payment gateway, software that links your site’s shopping cart to the processing network. The second is the payment processor (or merchant service), which does all the heavy lifting: moving the transaction through the network, sending you a billing statement, working with your bank, etc. Often, your merchant bank is also your payment processor, which helps simplify things.

Payments Procedure

As a business owner, it’s helpful to understand exactly how money moves from your customer to you. There are two stages to payment processing: the authorization (approving the sale) and the settlement (getting your money into your account).

The transaction goes roughly like this:

1. Your customer buys an item on your site with a credit or debit card.
2. That information goes through the payment gateway, which encrypts the data to keep it private, and sends it to the payment processor.
3. The payment processor sends a request to the customer’s issuing bank asking for the money to pay for your stuff.
4. The issuer responds with a yes (an approval) or a no (a denial).
5. The payment processor sends the answer back to you that the sale was approved and also tells your merchant bank to credit your account.

All of the above takes place within 1-2 seconds.

The second piece of the process (where you get paid!) is the settlement:

1. The card issuer sends the funds to your merchant bank, who deposits the money into your account.
2. The funds are available. Sometimes, your bank lets you access your money before it’s even sent to them. They also might keep a portion in your account that you can’t touch, just in case there are things returned from customers later (called a reserve, in payments speak).

This half of the process can take a few days. Watch the following video to get a more detailed explanation of how this particular aspect works:

Pricing Policies

Now that you understand exactly how you get your money from the customer via payment processing, let’s address the cost issue. It’s no surprise that everyone who touches the transaction wants to get paid, including the issuing bank, the credit card associations (Visa, MasterCard, etc.), the merchant bank and the payment processor.

At its most basic, every time you process a transaction, you pay several fees:

• A percent of the transaction amount: The issuer gets paid by taking a percentage of each sale, called the interchange. This fee varies depending on a bunch of things, such as industry, sale amount and type of card used. At last check, there were almost 300 different interchange fees.*
• Another percent of the transaction amount: The credit card association (Visa, MasterCard, etc.) also charges a fee, called an assessment.
• Yet another percent of the transaction amount: Your merchant bank takes a cut by charging you a markup fee, the amount of which also varies by industry, amount of sale and monthly processing volume.
• A dollar amount for every transaction processed: The payment processor (who might also be your merchant bank) makes money by charging a fee every time you process a transaction (whether it’s a sale, a decline or return — no matter). Plus, it can charge fees for setup, monthly usage and even account cancellation.

Many times the above fees are bundled together, so you can have a tough time figuring out who’s getting what amount of your money. Even crazier, there are three different ways processors can structure those fees:

1. With flat-rate pricing, you pay a fixed percent for all transaction volume, no matter what the actual costs are. All of the above fees are baked into this single rate. For example, you are charged a bundled rate of 2.9% of the transaction amount + $0.30 per transaction. On a $100 sale, the fee you pay works out to be $3.20.
2. With interchange plus pricing, your merchant service charges you a fixed fee on top of the interchange — for example, 2% + $0.10 on top of a 1.8% interchange fee. On a $100 sale, that works out to be a $3.90 fee. Remember, too, that there are 300 or so different interchange fees, so the 1.8% can vary wildly.
3. In tiered pricing, the processor takes the 300 or so different interchange rates and lumps them into three buckets (or pricing tiers): qualified, mid-qualified and non-qualified. This makes it simpler for you (and them) to understand. However, since the processor defines the buckets however it wants, it can be expensive. As an example, the fees you pay on a $100 sale could range from $2.50 to $3.50, depending on how it has been classified.

Complicated? You bet. Important to know? Definitely. In all, it pays to do your homework when shopping for a merchant service. That way, you can be prepared with a plan that works best for you, your customer and, ultimately, your business.

*For more details on different credit card interchange fees, read up on how Visa, Mastercard, American Express and Discover handle the issue.