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A Guide to Credit Card Processing

Credit and debit cards can be a business owner’s best friend and worst enemy. Customers expect to be able to use them in your store, but the system for processing these payment methods can be confusing and expensive. Here’s what you need to know about how credit card processing works.

banner of terminal and visa card

What is Credit Card Processing?

Credit card processing is the method of transferring money from a customer to a business via a credit card. When a credit card is used, banks, merchant services providers and card schemes like Visa and Mastercard all come into play.

A series of rapid-fire communications between these parties is necessary to authorise a transaction. As a business owner, you have to pay the associated fees to make this digital process happen.

Why Should I Care About Credit Card Processing?

When running a business, you’ve got plenty to worry about. It’s all too easy to lose track of credit card processing costs and suffer the burden of hidden fees. Once you fundamentally understand the nature of credit card processing, you’ll have a much easier time keeping your costs in check.

Who is Involved in Credit Card Payment Processing?

  • The cardholder is the customer who is using a credit card in a transaction.
  • Issuing banks are the banks or financial services which distribute credit cards.
  • Merchants are businesses that accept card payments in exchange for goods or services.
  • Acquirers are banks or other financial institutions that facilitate credit card transactions and process payments into the merchant’s account. They interact with merchants, acquirers and card schemes to facilitate the transaction.
  • Card schemes like Visa and Mastercard set guidelines for the use of their cards and act as a go-between for the issuing and acquiring bank.
  • A business’ payment terminal and point-of-sale system allows the cardholder and merchant to interact and track the process.

How Does Credit Card Processing Work?

  1. The cardholder presents their card to the merchant. This might be done through a physical point-of-sale terminal or an eCommerce gateway for online payments.
  2. A request is sent from the merchant to the payment processor to authorise the transaction.
  3. The payment processor, card scheme and issuing bank communicate to authorise the transaction.
  4. The issuing bank approves or declines the transaction. Transactions might be declined if there is insufficient credit, if the cardholder’s account has been closed or in the case of fraud.
  5. The status of the transaction (either approved or denied) is communicated to the card scheme, acquirer and merchant. Finally, it is displayed on the terminal.

That might sound like a lengthy procedure, but it all takes place in seconds. The processing of large groups of payments into the business’ merchant account will subsequently occur, usually within a few days.

Is Credit Card Processing Secure?

With the proper safeguards in place, credit card processing is secure. Credit card transactions will always be a ripe target for fraud, so it’s very important to take the necessary steps to protect you and your customers.

Your business’ payment processing should comply with the Payment Card Industry Data Security Standard (PCI DSS), a series of regulations developed by large card schemes, including Mastercard and Visa. These regulations carry additional significance for businesses that store customer card data in any way. You can find PCI DSS merchant resources here.

The good news is that for most business owners, many of the most important credit card security measures have been taken care of for you. For example, the EFTPOS system features a raft of features, including the tokenisation of payment data. This ensures transaction details aren’t shared with third parties.

If you’re concerned about your business’ payment security, accept mobile payments like Apple Pay and Google Pay. These extra-safe payment processes offer additional security features like biometrics. Also, ensure your terminal software is up-to-date and take steps to prevent your systems from being physically tampered with.

You can read more about the reliability of EFTPOS and the security features found in Smartpay terminals here.

Debit Card vs Credit Card Processing

Debit cards function differently to credit cards. Credit cards allow customers to access funds via a continuous line of credit the issuing bank provides. When they use a debit card, they simply use their own money they’ve previously deposited with the bank.

Since debit cards present little risk, banks pre-authorise their use. That results in a much simpler and faster payment process, and could mean reduced fees for your business. 

Credit Card Processing Fees and Costs

If you own a business, you know that credit card processing costs pile up fast. These fees fall into three categories:

  • Interchange fees: Fees paid to the issuing bank on every transaction.
  • Scheme fees: General service fees charged by card schemes (such as Visa & Mastercard), typically on every transaction.
  • Acquirer margin: Fees levied by the bank or payment facilitator to cover such costs as providing card acceptance services customer support and settlements.

Different types of cards carry different kinds of fees. For example, certain premium reward cards require higher interchange fees to cover the costs of bonuses offered to the cardholder, such as reward points, flights or other rewards. Meanwhile, American Express and Diners Club cards all have boosted scheme fees.

The Reserve Bank of Australia has found that on average, American Express cards attract total merchant fees equal to 1.7% of the transaction value. Mastercard and Visa cards attract merchant fees equal to 0.9% of the transaction, on average.

For comparison, Mastercard and Visa debit card transactions carry average merchant fees of just 0.5%.

Who Pays the Credit Card Processing Fee?

Credit card processing fees are charged to the merchant. Whether they come from card services or payment facilitators, these costs will be passed on to your business.

Can I Pass on Credit Card Fees to Customers?

Yes, merchants are able to pass credit card fees onto their customers by way of a surcharge. Surcharges are additional fees levied on credit or debit card payments.
You can read the latest rules regarding card surcharges on the Australian Competition and Consumer Commission website. Some of the most important regulations for Visa, Mastercard and EFTPOS payments include:

  • Surcharges can be up to the costs incurred by the business to accept that payment type.
  • Surcharges can only include costs incurred for using a particular payment type. For example, costs that only apply to credit card transactions cannot be included in a debit card surcharge.
  • If there is no way for customers to pay without paying a surcharge, the surcharge cost must be included in the product’s displayed price.

Use Zero Cost™ EFTPOS and Save

If you want a fuss-free way to wipe out merchant service fees, Smartpay’s Zero Cost™ EFTPOS is the way to go. Zero Cost™ EFTPOS allows you to pass your credit card processing costs onto your customer with ease. It automatically calculates the correct surcharge and allows you to customise when surcharges are applied and to which cards.

Find out more about Smartpay’s Zero Cost™ EFTPOS here. If you’d prefer to avoid surcharging, check out Smartpay’s Simple Flat Rate plan.

How to Accept Credit Card Payments For Your Small Business

You have many options when it comes to accepting credit cards for your business. If you want a simple, mobile and intuitive credit card reader, Smartpay is the way to go.

Our mobile credit card reader accepts all major credit card types (including Apple Pay and Google Pay), is easy to use with a speedy setup and includes a bevy of security features for your peace of mind.

What’s more, our Zero Cost EFTPOS and Simple Flat Rate plans offer straightforward and uncomplicated ways for your business to handle the fees and costs associated with the credit card payment process.

Find out if Smartpay’s credit card reader is right for your business today.

Want to know more about surcharging?

If you’re keen to learn more about how surcharging on EFTPOS works, or what you could save, find out more about SmartCharge. To talk about how surcharging could work for your business get in touch with the team at Smartpay.