Introduction to Payment Processing
Payment processing is essential to the success of a business. But as an intricate and complex part of the retail experience, understanding payments can be tough, and finding clear, concise explanations of need-to-know details can be even more difficult.
This blog will break down the most important pieces to payment processing so telecom retailers can be confident they’re aware of everything happening in the purchase process.
Understanding payment cards
When a customer hands over their card, there are a few important things to note. Let’s consider an example. Mitchell is our hypothetical cardholder, and this is his card.
On the card we see:
• Issuing Bank: RBC
• Cardholder: Mitchell
• Card Brand: Visa
What does a payment look like?
Our customer, Mitchell, wants to purchase a mobile device. Phones4Less is our hypothetical store, also known as the Merchant or Retailer.
Mitchell walks into Phones4Less and wants to buy something with his credit card. Phones4Less needs a way to get Mitchell’s money to their account. To process the transaction, Phones4Less needs an Acquirer; a bank or financial institution that processes credit or debit card payments on the merchants’ behalf.
This is how Mitchell’s payment is processed:
Where does the money go during a transaction?
When a transaction is put through, every party involved gets a portion of the payment. When Mitchell uses his credit card, Visa — the Card Brand — sets rates for transactions. The card brand says that “if you accept Card A, RBC (the Issuing Bank) needs to get $X from the transaction.” The Acquirer also adds fees to the transaction so they get paid too.
Let’s go through an example. If Mitchell makes a $100 payment at the store, the Issuing Bank gets a portion of this, the Acquirer gets another portion, and the retailer (also known in the payment world as the Merchant) gets what remains.
With a fee structure of interchange + 2% (let’s assume an average interchange of 1.6%), here’s how the money gets disbursed.
This breakdown of the payment differs between Card Brands and is one of the reasons many stores won’t accept American Express (AMEX). AMEX fees are higher because the Card Brand offers great rewards to their customers. AMEX sets high rates for those cards, and the Merchant loses more of the payment at the end of it all.
What is Interchange?
Interchange is the name for the fee that goes to the Issuing Bank. What makes interchange tough is that there are hundreds of different interchange fees for different cards, types of transactions, and other variables — fees can vary depending on if the payment is an in-store or online transaction, the transaction size, and more.
Here is an example of what the interchange could be:
Card A: Charge 2.1% of the transaction, plus 15 cents per transaction
Card B: Charge 1.74% of the transaction, plus 10 cents per transaction
Because of all the different rates for interchange and processing rates per card type, we use the “Effective Rate” to calculate the average cost a merchant pays per payment or transaction. Divide total card fees by total sales volume and you find your Effective Rate.
The Effective Rate calculation looks like this:
Total Card Fees (paid by merchant)/Total Sales Volume = Effective Rate
There are four common payment processing models used today. An Acquirer might have a set model for all customers, different models based on each customer, or a blend of the options. Here are the four pricing models in detail.
Interchange Plus is the interchange set by the card bank plus a processing fee by the Acquiring Bank. This is the most transparent pricing model, as the merchant can easily see interchange and the Acquirer fee.
Example: Interchange = 1.74% and 10c per transaction
Plus = 0.5% and 3c per transaction
Interchange Plus = 2.24% and 13c per transaction
A subscription model is usually the interchange rate plus a monthly fee.
Example: $55/month/location + interchange on every transaction.
A Flat Rate model provides the same fee to the merchant on all transactions; for example, 3.2% per transaction. This type of model is risky for the Acquirer because it averages all the fees in hopes that the merchant processes more cards with lower fees over cards with higher fees, like Amex.
This model is great for smaller businesses as it is easy to understand. For larger businesses, processing higher volumes, this pricing model means you are paying more fees than in an Interchange Plus model.
A Tiered Pricing model strives to blend the simplicity of Flat Rate with the flexibility of Interchange Plus. This is done by creating a few categories into which all transactions are sorted. Rather than one flat rate, the transaction may be charged at one of three potential rates, and the rate charge is chosen based on the transaction details. This model can be as simple or as complex as the parties decide.
Payments may seem like a behind-the-curtain process, where merchants don’t need to know the details of how money gets into their pockets, but nothing could be further from the truth. Payment processing literacy is important not only to understand all areas of your telecom business, but also to ensure the best decisions are being made for optimal payment services without overpaying.
Integrated payment processing services help merchants make the most of their payment technology. Whether it’s an in-house solution or a third-party payments provider, integrated processing plans that work with systems mean fewer errors and less redundancy. Discover the power of effective payments integration with iQmetrix.