We often use credit cards as our payment method. A credit card seems easy to use; However, the card has a complex process. Each time we make a payment with a credit card, processes are happening in the background. Here, we will explain how pay per use credit card processing works.
What’s Pay Per Use Credit Card Processing?
When we use a credit card as the payment method, it proceeds the transaction. For each transaction we made, the credit card went through several actions to complete the business. The Credit card processor is a middleman between the buyer, the merchant, and the credit issuers.
The credit card processor will charge some fee for the service. Merchants are obligated to pay for this service, and they can decide to pay it for each transaction or per batch of payment. Pay per use credit card processing fees can vary depending on each provider.
Commonly, the charge is 0.5% to 5% of the transaction with additional fixed fees. Merchants who allow for credit card payment must prepare the device and other needs.
First, they must have an acquiring bank partnering with an electronic payment service. The fees can be per transaction and a monthly fee for managing the merchant’s account.
Second, a merchant must have fees for network processing. This network processing connects the customer to their acquiring bank. Examples of network processing are Visa, Mastercard, American Express, and Discover. They have a fixed fee per transaction as well as an annual or monthly rate for card management.
To apply pay per use credit card processing service, merchants must arrange the fees for the acquiring bank and network processing service. They may need another component, like terminal fees. Terminal fees charge for each using the terminal to make a payment with an electronic payment card transaction.
Who is Involved in the Credit Card Transaction Process?
Aside from the buyer and the merchant, other parties are involved with the credit card transaction process. These are the key players in the credit card transaction process.
- A Cardholder/buyer: The person who initiates to make a payment using a debit and credit card.
- Merchants: Persons who facilitate the electronic payment service.
- Issuing Banks: The ones who approve cardholders’ payments using their cards. Issuing bank/ issuer is also known as the cardholder’s bank.
- Acquiring Banks: This bank is the merchant’s bank; it is the one that manages the merchant’s account and allows them to deposit the card payment.
- Credit Card Network: The one who bridges between issuing bank and acquiring bank. They also determine the fee for each transaction.
- Credit card processor: The company that proceeds with credit and debit card payments.
How is the Credit Card Transaction Work?
We know that how credit cards work is not simple. Merchants need to partner with their acquiring bank to facilitate the electronic payment service. In pay per use credit card processing, there are three types of processes. The process includes authorization, settlement, and funding. Here is the explanation:
The authorization process includes the buyer or the cardholder using their credit card as their transaction method. An explanation of the authorization process is below:
- The buyer or cardholder makes a transaction using a credit or debit card. They can use it in person or online.
- Merchants submit the request for payment authorization by using a credit card processor.
- Then, the payment processor sends the transaction information to the acquiring bank.
- The acquiring bank directs the credit card transaction information to the credit card network.
- Credit card networks submit the data transaction to the cardholder’s issuing bank and request payment authorization.
- The Issuing bank verifies the information and decides to approve or decline the authorization request.
- Issuing bank sends the response back to the credit card network, the credit card processor, and eventually the merchant. If the payment is approved, the cardholder receives the receipt of payment.
2. Settlement and Funding
This process is essential for the merchant. The method shows how the merchant gets their money from credit card transactions. Here is the process:
- The merchant submits the batch of authorized payment to the payment processor.
- The payment processor sends the transaction details to the credit card network.
- Credit card networks connect the transaction to information to the issuing bank.
- The issuing bank asks for payment to the cardholder’s account for the amount of the transaction.
- The issuer sends the appropriate fund for the transaction to the merchant bank. Issuing banks may charge an interchange fee.
- Merchant bank deposits the fund into the merchant’s account.
Types of Credit Card Processing Fees
In pay per use credit card processing services, merchants likely encounter fees for the transaction service. There are three types of main credit card processing fees. The fees are payment processor, assessment, and interchange.
1. Payment Processor Fee
The payment processor provides services such as equipment to take physical cards or online getaways for virtual shopping services. Therefore, merchants need to pay the payment to the payment processor for managing transactions. Merchants may choose to pay per transaction, monthly, or the cost of the card transaction tool.
2. Assessment Fee
This payment is related to the credit card network. Merchants pay the fees so they can use certain credit cards. This payment can combine with an interchange fee; Therefore, the total assessment and interchange is called the swipe fee. Credit card network companies may have different policies regarding their assessment fee.
- Discover: 0.13%
- American Express: 0.15%
- Visa: 0.14%
- Mastercard: 0.13% for transactions under $1,000; and 0.1% for transactions above $1,000.
3. Interchange Fee
Issuing banks receive the interchange fees for each transaction. The charge is typically around 1.5% to 3.3%; however, it can be different for each merchant because of some factors. The factors include the merchant’s credit history, the current interest rates, and the amount of money transferred.
Payment Processor Pricing Model
In pay per use credit card processing services, credit card processing fees have different ways to calculate their price. The price can be fixed or fluctuate. There are three pricing methods for payment processing: flat-rate, interchange plus, and tiered pricing model.
1. Flat-rate Pricing Model
Just like its name, flat pricing has a fixed price per transaction. Typically, it charges a small fee of around $0.20 to $0.30 per transaction. The benefit of this pricing model is that you can easily calculate the cost. However, the drawback is the price is the same for small transactions.
2. Interchange Plus Pricing Model
This pricing model allows the merchant to pay the interchange rate that has been made as well as a predetermined transactional rate. It also allows you to get the lowest possible interchange rate. Some factors influence interchange rate, such as sector, volume, and number of transactions per month.
3. Tiered Pricing Model
The pricing model categorizes its price into separate tiers or buckets. The qualified transaction might get a lower price, while the non-qualified most likely get a higher price. If you want to use this pricing model, it would be better if you plan about this qualified rate.
Know How Pay Per Use Credit Card Processing Service Work
Pay per use credit card processing has a complex process. Merchants who want to facilitate electronic payment services need to prepare several things, including encountering fees. Merchants need to partner with their acquiring bank, the credit card network, and the credit card processor.
Therefore, merchants must plan out first before getting their electronic payment service done. They may consider the right provider and good pricing method, or calculate the possible price.