Back to School, Part 1: The major players in a credit card transaction

Back to School, Part 1: The major players in a credit card transaction

No doubt about it; even with less people using their credit cards in the aftermath of the Great Recession, chances are you won't earn much of a profit without a good credit card processing system. But first, you need to get to know the players, learn how the card processing system rolls along and ask the right questions before you settle on a new system. That way, you'll be way ahead of your competition -- and ahead on your bottom line, too.  

Job one is to get to know the players you'll meet along the route through a credit card transaction. Here's a quick list:

The five major players
1. Credit card carriers, such as MasterCard and Visa: In contrast to conventional wisdom among merchants, credit card issuers play a small role in the actual processing of a card transaction. By and large, big card companies like MasterCard and Visa establish the rules on how their cards can be used -- and how much they can charge retailers for fees. Card providers, along with banks that actually issue the cards to customers, establish rates (called "interchange rates") and fees (known as "pass-through fees") for specific credit cards. Those charges vary for different types of cards, including debit cards, credit cards, rewards cards and business credit cards. But for each type of card, merchants are charged the same rates. No retailer will pay a higher cost for credit card processing than any other merchant.

2. The participating bank: Credit cards may include a major card brand, such as Visa, but they also carry the name of an issuing bank, which provides the card to consumers for commercial use. Some card companies play dual roles. American Express, for example, doesn't use a bank; it acts as both the credit card financial backer and the card issuer.

3. Transaction processors: Card companies and banks outsource the processing of card transactions to third-party providers, usually technology companies, that send the transaction from the retailer's register to the issuing bank, which confirms and approves the transaction. The processing company charges the merchants transaction fees, which are built into the interchange fees and paid to the third-party processor by the issuing bank.

4. Merchant account provider: If you don't want to interact directly with card companies or banks, you can hire a "middleman" known as a merchant account provider. They'll handle all the processing, fees and paperwork associated with a merchant credit card transaction for a fee -- usually at a mark-up.

5. Payment router: There's yet another link in the credit card processing transaction: the payment gateway. All merchant shopping carts require a payment gateway, but you likely won't interact directly with a payment gateway vendor. The merchant account provider will likely handle any fees and charge you a monthly fee for the service.

See related: Back to School, Part 2: Credit Card processing, 4 key issues; How to decode your merchant payment processing system

Published: June 29,2023