Credit cards have revolutionized the world of sales and transactions. Everything happens in a matter of seconds, and you can walk out of the store with your new items or services without ever having to touch cash or go to a bank.
Do you know how credit card processing really works? You may be used to swiping the card in a terminal or reader, but have you ever stopped to consider what goes on behind the scenes? Here’s a simple look at the way it works:
Step 1: Charge the card. The sales clerk inputs the amount to be paid into the terminal, and the card is swiped or inserted. The magnetic strip or chip reader accesses the information on the card, and the credit card processing system connects with your bank to 25begin the transaction.
Step 2: The money is deducted. With a credit card, the money doesn’t come out of your bank (savings or checking account) like it does with a debit card. Instead, the money to purchase the product or service is deducted from your credit account. Regardless, the money is deducted from your account.
Step 3: The fees are deducted. Like it or not, every credit card transaction comes with some fees. There are three basic fees involved in credit card processing:
Card brand fees. Visa, MasterCard, American Express, Discover, and all the other credit card providers charge a nominal fee for the use of their card, plus another tiny fee per transaction.
Interchange fees. This is a fee applied by the bank that issued the card (Wells Fargo, Bank of America, Citibank, etc.). It’s a “service fee” that is a percentage of the sale, as well as a transaction fee.
Processor fees. This is the fee applied by the merchant’s credit card processor service in order to facilitate the payments. Processor fees are usually around 1 to 3%.
The good news is that these fees are usually fairly low. You’ll end up paying only around 2-5% more per credit card transaction than you would paying with cash.
Step 4: The payment is approved. Once the request has been processed through the proper organizations (bank, credit card company, and processing service), the payment is approved and the money is sent to the merchant’s account.
Amazing, isn’t it? All of this happens in the space of a few seconds!