How Does Online Credit Card Payment Processing Work?

I get a lot of questions from my clients about online credit card processing: how it works, how the fees are structured, and how to lower the fees. This whole system is very, very complex, and I’m not convinced that there is anyone in the world who really understands every aspect of it.

High level summary:

  1. You fill in a commerce payment form on a website, then click SUBMIT. (There are thousands web vendors who can provide custom or off-the-shelf web forms for this purpose.)
  2. Your payment info goes through a Payment Gateway (e.g., PayFlow Pro or Authorize.net) to the Processor of the Merchant’s BankCredit Cards
  3. Next comes authorization. Depending on card type, this might come from the Processor or the card-issuing Bank. Bottom line: someone says ‘approved’ or ‘declined.’
  4. Approved transactions are then ‘cleared’ for settlement
  5. Settlement is when the money actually moves around. This is usually in a nightly batch but sometimes it is real-time (which can lead to reconciliation headaches for businesses as then the fees are often deducted per transaction as opposed to a separate charge by batch or time-period).

This is a highly simplified breakdown; the process varies depending on the vendors involved. (For example, some vendors can handle more than one step in this process.) There are industry professionals who spend all of their time, every day, thinking about credit card processing. I actually spoke to a ‘Durbin Amendment’ Specialist’ a few weeks ago. His entire job focuses on understanding the so-called Durbin Amendment (and the Durbin amendment’s associated scams) which is just one piece of the larger Dodd-Frank Wall Street Reform and Consumer Protection Act (effective 10/1/2011), which only impacts certain pieces of the huge card processing industry.

This complexity helps to explain why fees are so high. Every single ‘player’ in this system needs to get paid for doing their part. The more complexity, the higher the cost.

So how do you lower the cost of these fees?

  • Talk to your current merchant bank. They might actually have some immediate ideas for you.
  • Ask for and include CID/CSV on your payment transmissions, whenever feasible.
  • Ask for and include Billing Address on your payment transmissions, whenever feasible (Note: some banks give a processing fee break for just providing zip code, so you can save your user some time by just asking for it.)
  • Shop around for a new merchant bank, processor, or gateway. Everyone wants your business, and sometimes a ‘little guy’ can give you a better deal than a ‘big guy’. But beware! There are costs to making these changes, so be sure that the money you’d save in fees justifies the cost to make the change.

Has anyone stumbled upon good articles, diagrams, or explanations of this complex industry that are aimed at the novice as opposed to the expert? I’d love to see them.

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Tanya Kennedy Luminati

About Tanya Kennedy Luminati

When she is not at Matrix Group managing day-to-day operations of MatrixMaxx, she is at home being a full-time mom to her son, Alexander, playing video games with her husband, or brewing up a pot of soup for family and friends. She makes a killer white bean and sausage soup. Be sure to ask her for the recipe the next time you see her.

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