Credit Card Payment Solutions- What Businesses Need To Know

Tanu Chaturvedi Tiwari10/18/2021

What are Card Payment Solutions?

Card payments solutions allow the user to make a payment on a merchant's website or physical store by using a debit or credit card. A card payment solution can be a stand-alone service or integrated into a POS system.

What are Credit Card Payment Solutions?

Card payment solutions for small businesses can offer a level of flexibility and convenience that is compelling to many retailers. For some industries, such as the restaurant and hospitality industry, using card payment solutions can help to streamline the ordering and payment process, reduce the high risk of theft, and eliminate the need to manage cash. Payment solutions can be a huge cost-saver for businesses.

For example, if you operate a retail establishment, you'll likely need to do a lot of business-to-business transactions. In that case, a card payment solution can be a lifesaver. If you routinely travel abroad, a card payment solution can help you get a better exchange rate.

Credit card payment solutions are the main choice to pay for goods and services in today's society. But when you're in the position to make this choice, how are you supposed to know which is the best credit card payment solution? The answer to that question is subjective, but here are a few things to consider when looking for the best credit card payment solutions.

Fees Associated

Credit cards are an easy and convenient way to make payments but there are several fees associated with them that can increase payment charges if you miss a payment or exceed your limit. It is important to know about the number of fees you may be charged for using a credit card. Typically, there are 3 types of credit card fees.

The first is the membership or the annual fees charged just for maintaining a credit card account. Then, there are optional fees including balance transfers or foreign transactions fees. And the third type is penalty fees that consumers are charged for violating the terms and conditions of a credit card, such as termination fees. In this blog, we will look at some of the common credit card fees that may vary depending on your merchant services provider.

Transaction Fees- Card processing services charge a small transaction fee every time a customer makes a payment using a credit card. The transaction fee can be divided further into interchange fees and cents per transaction fee. To process credit card payments, small businesses need to interlink their card network with a merchant account that lets the business accept payments using credit cards. A small transaction fee is also charged by the merchant account that depends on the type of business and the number of transactions a business makes.

Recurring Fees- Payments are made repeatedly on a prearranged payment schedule that can be weekly, monthly, quarterly, or annually. Card providers charge business owners recurring fees to maintain a merchant account. Typically there are two types of recurring fees--fixed and variable. A business is charged a fixed amount every time a payment is made for the scheduled period, while with a variable fee, businesses pay fluctuating amounts that can change with every payment.

One-time Fees- Card processing solutions providers charge a one-time processing fee that is paid only once. One-time fees include early termination fees, terminal fees, reprogramming fees, setup fees, address verification fees, PCI compliance fees, payment gateway fees, and chargeback and retrieval fees.

Parties Involved

Every credit card transaction involves various parties, such as the cardholder, the merchant, banks, card associations, and payment processors. Typically, a credit card transaction involves 3 main steps-

1. Payment authorization- Customer swipes or scans a credit card.

2. Payment Settlement- Transaction information is transmitted to credit card processors and card associations.

3. Funding- Businesses receive the money in their account from the sales.

Here is a glossary of various parties involved in a credit card transaction-

Cardholder- The business or a customer that owns the card and wants to use it to purchase goods and services.

Merchant- The retailer selling the goods and services and accepting the payment via credit card.

Acquiring Bank- The bank linked with the merchant that is selling the goods and services.

Issuing Bank- The issuing bank transfers the cost of the goods and services purchased by the customer with an assumption that the cardholder will make the payment according to the credit card agreement. The issuing banks have rights reserved to stop a payment in case it finds any discrepancies in the transaction.

Card Association- Credit card association companies are not banks, but they oversee the transaction and set interchange rates, and provide settlement services between acquiring and issuing banks. These are mainly for companies- MasterCard, American Express, VISA, and Discover.

Payment Processor- These are third-party companies hired by the acquiring bank to handle credit card processing. Payment processors provide customer service and technical assistance for customer support to the acquiring bank.

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Pros- Allowing Card Payments

There are many benefits of payments using credit cards. Some are listed below-

Credit cards can build credit- You can build your credit score through your payment history. For example, if you pay the minimum amount due per month before the last day of the statement period and never miss your dues, your credit score will build and you have better chances for approval for loans or mortgages. Building credit can reap long-term benefits as you can win reward points on every transaction.

Safe to carry solutions- Credit cards provide a safer method of payment compared to cash. You can cancel a card immediately in case of theft, while it is almost impossible to get cash back if it is stolen or lost. Credit card companies can block a card if it is misplaced or stolen and issue a replacement in 3-7 business days to avoid any fraud related to customer information. Customers can make quick and easy mobile payments using smartphones and virtual terminals with credit cards, on the other hand, cash payments require customers to visit ATMs to withdraw cash for payments.

Earn rewards points- You can earn reward points such as cashback perks and even flights with partner airlines when you make eligible goods and services. You can redeem these reward points through the bank's rewards programs. Although reward cards typically cost an additional fee, in the long term, the benefits of keeping the card open can outweigh the fee.

Cons- Allowing Card Payments

There are a few disadvantages of using credit cards. Let's take a look at them-

High-interest rates- Credit and debit card payments are an easy and convenient way to make payments, but it comes at a cost of a high-interest rate. Many Credit Cards charge high service fees and annual interest rates on borrowed money and penalties for delayed payments. If a business misses a minimum due amount per month, existing debt can increase manifold quickly. Credit card providers also offer cash advances in case a business needs cash immediately but the interest rate on cash advances is comparatively higher than for purchases.

Easy to cross credit limit- Customers suddenly have access to more funds when they secure a new credit card. This may result in overspending and crossing the credit limit easily. Customers need to keep a check on their spending in order to avoid any additional burden and potentially damaging their credit score.

Additional fees can add up- Depending on your card, you can be charged additional fees if you miss paying your monthly minimum due amount or if you overspend your credit limit, and for transactions in a foreign land, or some hidden fees.

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Pricing Models

When you accept payments using credit cards, the processing costs will depend on the pricing model your credit card payment processor or the merchant service provider uses. This makes it a major thing to look for when searching for the right card processor for your business. To begin, let us know that credit card transactions have 3 parts- interchange, assessments, and markup.

What is Interchange-Plus Pricing?
The interchange-plus pricing includes the cost of interchange and card network assessments as well as an additional markup per transaction. These components are separately mentioned on your payment statement that allows you to easily understand the wholesale cost and the markup charged by the processor. It results in fluctuating rates as per the variable interchange rates set by the credit card providers.

What is a Flat Rate?
At a flat rate, a fixed percentage is charged on the basis of your business's sales volumes. The flat-rate model is easier to understand for customers with limited knowledge of interchange fees and card network assessments. However, the processing fees may be much higher than average as the processor will include its flat rates with a number of potential wholesale fees that cover the business's transactions.

What is Tiered Rate?
The tiered rate model includes high payment processor markups. In the tiered rate model, card transactions with different card network assessments and interchange rates are grouped together, and the base of the tier rate is usually the highest possible interchange fee for the transactions. The tiered model is not as transparent as the interchange-plus pricing model that makes it difficult to understand and to figure out the difference between the interchange fees and assessments charges and the markups by the payment processor. Processors may also include additional fees for a number of online credit card processing services.

Payment Processing Technological Advancements

Thanks to technological advancements in payment processing, customers don't need to carry cash on hand to purchase anything they want. Businesses can pay for goods and services with a credit card or even better a smartphone. Let's go through some of the technology solutions best for payment-

Online billing- Business owners can use online invoicing solutions to automatically generate invoices for easy and quick updating of invoices. Businesses can also opt for online payments of credit card bills.
Chip cards- Chip cards are one of the safest ways to make payments. They include a cryptogram that helps banks find any fraudulent cards or transactions.
Smartphone payments- Businesses can accept payments through a smartphone via various payment processing apps that can also be used for tradeshows and pop-up stores.
POS systems- Pos Systems are a combination of hardware and software that allow businesses to accept digital payments systems through countertop terminals, mobile phones, iPads, and tablets. Retail and Restaurant Pos systems are the most commonly used for payment processing. A Point Sale system can be converted into a mobile Pos Solution for faster payment processing.
Virtual payment software- Businesses can accept payments using a virtual terminal app even when the card is not physically present. Businesses can accept credit card payments through a phone.
Application programming interface- Business owners can accept payment through APIs that allow 2 apps to interact with each other making the payment process faster and easier.

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