Electronic Payment Processing Basics

Electronic Payment Processing Basics

Credit Cards

There are essentially two types of credit cards: bankcards and non-bank cards. Visa and MasterCard are considered bankcards. American Express, Discover, Diners and Carte Blanche are considered non-bank cards. Encore Payment Systems processes all major credit cards including Visa, MasterCard, American Express, Discover, and Diners. To accept credit cards, merchants are required to pay standard fees called discount rates and transaction fees. The discount rate is a percentage of each transaction and the transaction fee is a flat fee that is charged on a per sale basis.

A “merchant account” is required to accept credit cards. A merchant account is a special account with a bank or sales organization that is a member of the VISA or MASTERCARD associations. Once a merchant establishes such an account, and has been set up on a POS (point-of-sale) system, they can start accepting credit cards from customers.

Step One

A customer presents their credit card for payment. By using the credit card number, they submit an electronic request to the processing network for “authorization to capture funds” from the cardholder’s credit card account in the amount of the purchase.

Step Two

This is done by swiping the credit card through the POS (point of sale) terminal. Once swiped, data is transmitted to the processing network. The processing network immediately receives the electronic request and determines if the card holder’s account is valid and if the funds are available. If both of these criteria are met, the processing network returns an electronic response back to the terminal or computer. This response is called an “Authorization Code” and is the merchant’s guaranteed authorization to capture the funds. Normally, this is a six-digit number. The transaction and its associated authorization are stored in a “Batch”, where other transactions for that day reside.

Step Three

The merchant’s terminal will then print a receipt for the customer to sign. As far as the customer is concerned, the transaction is complete. As far as the merchant is concerned, there is one more step to complete the transaction.

Step Four

At the end of merchant’s business day (usually), a final request is needed to go ahead and “capture the funds” (from all the transactions which were authorized during the course of the business day). This is called a “settlement”. When using a credit card terminal this process may be initiated manually or automatically depending on the system capabilities. The merchant must settle their terminal (transmit batch to host) in order to get paid on those transactions.

Step Five

Typically within 48 to 72 hours, the funds are deposited electronically into the merchant’s bank account. At the end of the month, Encore Payment Systems will mail a statement to the merchant detailing the credit card activity for the month and the associated fees they have been charged.

Debit/ATM Cards

A rapidly growing form of electronic payments is the debit/ATM, which in several ways is very similar to a credit card. Debit cards are essentially ATM cards with a Visa or MasterCard logo on them. They can be processed either as an ATM card (online) or a credit card (offline). By processing the transaction as an online transaction, the merchant can typically save money on each transaction. Instead of paying a discount rate and a transaction fee, the merchant only pays a flat transaction fee. This can save merchants hundreds or thousands of dollars annually.

Electronic Gift/Loyalty Cards

One of the most dominant trends in the retail landscape is client retention management. Given that customers have a myriad of retailers from which to choose, how can merchants make them more “loyal” to increase their visits and expenditures to a particular merchant?

One effective way to do this is with an electronic gift card and loyalty card program that rewards customers each time they visit. This type of payment has been embraced by large retailers for several years and is now available to smaller merchants as well.

Smart Cards

A smart card resembles a credit card in size and shape, but inside it is completely different. First of all, it has an inside -- a normal credit card is a simple piece of plastic. The inside of a smart card usually contains an embedded 8-bit microprocessor. The microprocessor is under a gold contact pad on one side of the card. Think of the microprocessor as replacing the usual magnetic stripe on a credit card or debit card.

Smart cards are much more popular in Europe than in the United States. In Europe, the health insurance and banking industries use smart cards extensively. Every German citizen has a smart card for health insurance. Even though smart cards have been around in their modern form for at least a decade, they are just starting to take off in the United States. Magnetic stripe technology remains in wide spread use in the United States. However, the data on the stripe can easily be read, written, deleted or changed with off-the-shelf equipment. Therefore, the stripe is really not the best place to store sensitive information. To protect the consumer, businesses in the U.S. have invested in extensive online mainframe-based computer networks for verification and processing. In Europe, such an infrastructure did not develop; instead, the card carries the intelligence.

References: MasterCard– Personal Finance

This article was written by Mark Harrelson, President of Encore Payment Systems. Contact Mark for personal consultation for all your online processing needs.