The Basics
In any credit card transaction, there are five major players: the consumer, the merchant, the issuing bank, the merchant’s bank and the credit card companies themselves. Here’s how it looks:
-
The consumer hands his credit card over to the merchant
-
A message is sent to the issuing bank, the bank that gave the consumer his credit card
-
Money is transferred to the acquiring bank, where the merchant has an account that allows him to take credit cards
-
Money is deposited to the merchant from the acquiring bank
-
A slight deduction is sent back to the issuing bank, which the issuing bank shares with
credit card company networks The credit card companies (Visa, Mastercard) which facilitate the transaction. To be part of a credit card company network—such as Visa or Mastercard—a bank must pay a fee. If your credit card has a Mastercard symbol on it, it’s affiliated with the Mastercard credit card company. Every time you make a purchase with that card, both the bank and the affiliated credit card company (Mastercard) make money from the transaction.such as Visanet or The Mastercard Network
Visa and MasterCard are not banks, although the logo does show up on bank-affiliated credit cards. They are simply credit card companies that help companies process credit card payments. American Express and Discover work differently in that they issue their own cards and process credit card payments through their own networks.
For Consumers: The Safest Ways to Run Your Card, Ranked
We talked to Beverly Harzog, a personal finance expert, consumer advocate and author of Debt Escape Plan and other books on consumer finance.
-
Chip and PIN card, in store
This is the highest level of security available because you benefit from both the chip encryption and having to use a PIN to complete the purchase. Unfortunately, although chip and PIN cards are very common in Europe, fewer chip card issuers in the U.S. require a PIN.
-
Chip and signature card, in store
Signature verification is less secure than requiring a PIN. But if the merchant has an EMV terminal that accepts chip cards, you’re ahead of the game, since chip card transactions are harder to hack.
-
Swipe cards in stores or online transactions
These two transactions are about equal when it comes to security. If you’re swiping a credit card, it’s possible for the information in your magnetic strip to be cloned or hacked. And the same goes for an online transaction where you’re entering all of your information—if that merchant is compromised, your info is accessible.
-
Manual
If a merchant takes an imprint of your card—and very few merchants are still doing this—you’re at risk, since there’s now a paper copy of your credit card number and expiration date.
-
Debit card
In all circumstances, it’s safer to pay with your credit card than your debit card, since credit cards come with greater consumer protections in general. Plus, if someone hacks your account, they don’t have access to the money you need to pay your rent or mortgage.
For Merchants: Choosing a Credit Card Processor
The best place to start may be your bank, since you already have a relationship with it. Compare it to other processors, and ask these questions:
-
How much are the transaction fees?
Processing fees may seem small to start, but charged on every transaction over time, they can add up. Typical transaction fees range from 2 to 3 percent on every purchase, although fees may differ for swiped transactions versus transactions where you key the number in manually.
-
What other fees are there?
Many processors also charge monthly fees, as well as “gateway” fees for a secure connection, and there may be others. For instance, you may pay a fee if you don’t hit a sales minimum each month, and you may also pay a PCI fee, which stands for Payment Card Industry—this is a fee a processor levies for fulfilling security standards.
-
When will you see your money?
Processors differ by days or weeks as to when the money hits your account, so find out when you can expect to see payments.
-
Will you be able to process different kinds of payments?
Does the processor have the ability to accept EMV (chip) cards? Will you be able to take payments from Apple Pay or Google Wallet? Make sure the processor can accept the kinds of transactions you anticipate happening.
-
What if something goes wrong?
Customer service is important, so look for a processor with phone support when you need it—which may be all the time, depending on your business hours.
Virtual Processing: How to Accept Credit Cards Online
This enables you to authorize transactions. You can find a payment gateway with a service such as Authorize.net or Sage.
3 tips for online merchants
If someone makes a fraudulent purchase on your site, you are liable (not the credit card issuer). Here are three ways to be more cautious with your transactions:
-
Be vigilant about purchases. This may include manually checking your orders for things that look strange or out of place, such as larger-than-usual transactions, a shipping address that doesn’t match the billing address or multiple orders to a foreign country (if you don’t usually ship internationally).
-
The technology does exist to accept online EMV payments. Consider the Chip Authenticated Program (CAP) from MasterCard and Dynamic Passcode Authentication (DPA) from Visa. These options are more prevalent in Europe than in the U.S., but you may want to ask your bank, card issuer or merchant account provider if they support the technology.
-
Some payment gateways or processors have fraud detection programs you can implement, such as Authorize.net’s Advanced Fraud Detection Suite.
In-Person Processing: the Credit Card Terminal and Other Products
-
Traditional retail terminals
If you’re dealing with customers face-to-face, you will likely be swiping physical credit cards. One method of doing this involves a countertop point-of-sale model that you’re probably familiar with—it sits at the check-out point and allows you or your customer to swipe a credit card and enter a PIN if you process debit or EBT (electronic benefit cards transferring funds from state benefits) cards.
-
Mobile and wireless terminals
Some companies also offer the ability to accept credit cards via your smartphone or tablet using some add-on hardware and a downloadable app. This allows you to accept credit cards and debit cards wherever you do business—even on the go—although you may not be able to process debit cards that require a PIN.
-
EMV compliant processors
As of October 2015, merchants that accept credit cards without using an EMV chip-card terminal are liable if fraud occurs from that transaction. (It’s no longer covered by the credit card company if you aren’t using an EMV terminal.) To protect yourself, you should have the ability to process EMV cards.
Mobile Card Processors
If choosing a processor is making your eyes cross, there are services out there that allow you to make transactions using your smartphone or tablet, bypassing a merchant account. Using Square, for instance, you would enter credit or debit card details manually, or use the company’s free magstripe card reader that plugs into your audio jack. You pay 2.75 percent of every swiped credit card transaction, or 3.5 percent plus 15 cents to enter the information manually, and the money is deposited into your bank account. There are no other fees.
Square reserves the right to shut down your account if you violate their terms of service or pose a high credit risk. Generally, Square is a better processing choice if your business is somewhat established, if your transactions are lower in average price point (under $100), if you aren’t processing a huge volume of transactions, and if you’re swiping or taking chip cards (not entering them manually).
There are other Square-like processors to consider, as well, such as Flint, PayPal Here, GoPayment, and Local Register.
Resources for Businessowners
U.S. Small Business Administration, Accepting Credit Cards
U.S. Small Business Administration, Online Payment Services
U.S. Small Business Administration, The Best Credit Card Processing for Small Business Owners
National Federation of Independent Business, What You Need to Know About Mobile Payments