Credit Card Processing: A Primer

You know that you must accept Visa and MasterCard; most catalogers wouldn’t be in business without them. And you know that credit card processing can be expensive, typically costing more than 2 percent of sales. But you probably don’t know if your payment processor is doing a good job, or if you’re getting value for your money. And what you don’t know might be hurting your business.

But a little information goes a long way. This article will provide ways to evaluate a payment processor, and tips to help you understand your options and make sure you’re getting the biggest possible bang for your payment-processing buck.

Key Roles

Payment processors fill four crucial roles:

1. They sponsor merchants into the Visa and MasterCard networks.

2. They perform the mechanical functions of transmitting credit card data.

3. They make sure merchants comply with the Visa and MasterCard rules and regulations.

4. And they collect fees for themselves as well as for the Visa and MasterCard networks and the banks that issue the cards.

The first role — sponsoring merchants into the card-association networks — requires the payment processor to guarantee that a merchant will meet its financial obligations. If you, as a merchant, cannot pay for refunds, chargebacks or other obligations owed to the card networks or card-issuing banks, then your processor will. Effectively, this means the payment processor gives you a line of credit.

This also is the primary reason processors often require merchants to maintain reserve funds, which provide security in case the merchant fails to: issue refunds, pay for chargebacks, or honor consumers’ claims for goods not shipped or services not rendered.

How large the reserve fund should be, and whether it’s required at all, is determined by the processor. Some types of businesses are riskier than others and generally will incur larger reserves. But without concrete rules for this, the reserve fund turns out to be a good way to compare service bureaus to decide which one to select as your processor.