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Methods Of Processing Credit Cards: An Overview

May 29, 2008
Running a business requires the ability to process credit cards. Without it, many of your customers won't make the critical decision to purchase. But, processing credit cards can be confusing to the uninitiated. There are several methods through which the processing is executed. Choosing the method that makes sense for your business is largely a matter of understanding how each methods works. Below, we'll give you an overview of the many methods available to you for processing credit cards transactions.

Credit Card Terminal

These small black machines litter the landscape of the traditional marketplace. Millions of stores use them to process credit card transactions. Typically, a customer's credit card is swiped through a thin trench on the box. This allows the terminal to read the magnetic strip on the card. Then, it uses a modem to contact the card's issuing bank to receive authorization for the requested charge amount.

The industry that supports and promotes credit card terminals to businesses is rife with hidden fees and contractual blind spots. Though a terminal may be a perfect fit for your business, be wary as your search for the best deal.

Automated Response Unit

Often, it's necessary for businesses to accept credit card payments from customers who order by phone. An Automated Response Unit (ARU) is used to allow customers to enter their card information using the buttons on their touch tone phone. An ARU can be a good option for those businesses who want to avoid the cost of implementing a credit card terminal.

Payment Gateway

Merchants who need to process credit card transactions online can do so by using a payment gateway. Once a customer's card information has been entered on a website, it is encrypted and forwarded to the card's issuing bank. The issuing bank responds by either approving or declining the charge request. This response travels the same route as the initial request, passing through the gateway. Eventually, the response is delivered to the website and the appropriate action is delivered to the customer. The process from the initial request to the website's action only takes a few seconds.

Tiered-Level Purchasing Cards

Purchasing cards were designed specifically to be used by businesses (or various government agencies) for the purpose of paying their suppliers or service providers. Many companies find "P-cards" convenient because they allow for higher-volume purchase orders without the processing work that conventional purchasing methods entail. A corporation may purchase thousands of items during its fiscal year. Paying suppliers usually requires an immense amount of paperwork and administration, often delaying payments. P-cards relieve much of that workload.

It's worth noting that the fees associated with accepting payments from these cards can be exorbitant. However, a business can significantly lower those fees by providing "level 2 or level 3 data" about the transactions.

Merchant Accounts

A merchant account is an arrangement between a business and a financial institution that agrees to accept credit card payments on the business's behalf. In effect, a bank provides the business with a line of credit. Merchant accounts carry many of the same inherent risks for the bank as a conventional line of credit. As a result, they often place limitations on which merchants are approved.

Merchant accounts are offered to businesses by banks or agents (called ISO/MSPs) who are sponsored by banks. Most small businesses acquire merchant accounts through the agents because the approval process is often easier and smoother. Plus, many of these agents can provide additional services that can be valuable to small businesses.

Choosing A Credit Card Processing Method For Your Business

Deciding on which method of processing credit cards makes the most sense for your business isn't easy. Not only are there several from which to choose, but there can be hidden fees and charges that can ambush someone who isn't familiar with the industry. Take the time to analyze the needs and budget of your business. There is a solution that can be a perfect match. Identifying that solution requires that you research all of your options.
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This article is brought to you by PaySimple, a leader in ACH processing.
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