Credit Card Processing Blog

When it comes to the rules and regulations governing credit card processing, it is not uncommon for both merchants and consumers to be in the dark.  For example, many merchants impose restrictions or apply special rules to consumers using credit cards, despite the fact they may be in violation of their merchant agreement.  Consumers often follow along with whatever is asked of them because they do not necessarily understand the credit card processing system or their own rights as account holders.  It is important for both parties to understand their rights and responsibilities when it comes to credit card transactions.  Here we look at one rule that this often misunderstood by participants on both sides of the fence.

Valid ID Not Required When Making Credit Card Purchase

It is important for credit card users to understand that they do not have to present a valid ID for credit card processing to take place.  Consumers are often under the false impression that by presenting their ID, it somehow adds protection against the fraudulent use of their credit card.  In reality, this protection is already provided by the issuer of the credit card.  While the law limits your responsibility to only $50 of unauthorized charges, many major credit cards offer total protection in the event your card is used fraudulently.  This means you, the consumer already have protection against fraud, so why then would the merchant be requesting a valid ID?

Reasons Why A Merchant May Ask For ID

There are a few exceptions which allow a merchant to ask for an ID before finalizing a credit card transaction, but for most normal sales activity, this is prohibited.  Nevertheless, some merchants, either unaware of the rule or working against it will ask to see ID.  In most cases this will be to ensure they are not accepting payment from an unauthorized user or a stolen credit card.  Other reasons, with are permitted, include verifying the age of the consumer if age restricted products like alcohol, tobacco or certain medications are involved.  Merchants can however protect themselves from processing a fraudulent transaction not by requesting ID but rather carefully inspecting the card to ensure it hasn’t been tampered with and comparing signatures on the receipt and the back of the credit card.  If the signatures do not match or the consumer has not signed the card, merchants are not required to complete the credit card transaction.

The Importance Of Understanding The Rules

Both consumers and merchants must make the effort to understand the rules governing credit card use to ensure their rights are protected.  The credit card companies and credit card processors are all part of a system that only works if all parties adhere to the rules set forth.  If a business violates their merchant account agreement, they risk losing the right to process credit cards all together.  When consumers are unaware of their rights and responsibilities they are also exposed to negative consequences.  An understanding of how the credit card processing system works and the rules which account holders and merchants must adhere to ensure everyone gets what they want out of the transaction.

Photo via Cormac Phelan

Credit card processing tends to follow the same transaction life cycle, whether your customer pays with credit cards in person or uses a credit card online or by phone.  The specific credit card processing events and activities may vary from one merchant or card issuer to another, but the basic life cycle is the same.

If you’re going to accept credit cards from your customers, it’s a good idea that you understand how the credit card processing life cycle works, how the money ends up in your account, and what happens if something goes wrong with the cycle.

Authorization of Card

1.            The credit card user presents their credit card to make payment in person, or enters their details into a form or dictates them to a customer service representative by phone.

2.            The merchant swipes the card or the account details are digitally entered into the system for submission to the merchant’s credit card processor.

3.            The merchant bank electronically requests card authorization from the card issuer (Visa, MasterCard, Discover, American Express).

4.            The card issuer approves or declines the transaction, and sends the response back to the merchant bank.

5.            The merchant bank sends response back to the merchant, and the merchant processes the transaction based on whether the card is approved or declined.

Clearing and Settlement of Payment

1.            The funds from the credit card payment are deposited into the merchant’s bank, the merchant’s account is credited and an electronic submission of the transaction is sent to the credit card processor.

2.            The credit card processing system facilitates payment, pays the merchant bank, debits the cardholders account and sends the transaction on to the card issuer.

3.            The card issuer posts the transaction to the cardholders account and sends the monthly statement to the cardholder for payment.

4.            Cardholder receives their credit card statement and sends payment.

Reasons for a Declined Credit Card

The merchant doesn’t get an explanation or reason for why a credit card is declined. Instead, the cardholder must contact their customer service to find out why their transaction was declined. Typically, declined transactions happen because the transaction was over the credit limit, a credit card payment was late, or the credit card has been used too many times that day.

Internet Payments – Extra Step

Internet payment processing adds an extra step because the credit card information must be encrypted to reduce the likelihood of theft. The customer inputs their credit card information into a web page and presses a “Submit” or “Send” button. Before the cardholder’s information is sent to the acquiring bank, it’s encrypted and passed through a payment gateway (e.g. VeriSign or Authorize.Net). The authorization is also encrypted before being sent back to the internet application.

Maintaining Consumer Credit Card Safety

As a merchant accepting credit cards, you should understand your role in keeping the credit card data safe throughout the credit card processing life cycle.  Your data storage systems should not maintain any of the magnetic-stripe data received after a customer swipes a card and the transaction has been processed.  After the card is authorized, all information taken from the swiping of the card must be deleted.  You can maintain account number, expiration dates and names from credit cards if you do so in a CISP-compliant manner, but no other information can be stored.

If you use the CVV2 number for verification purposes in some or all of your credit card transactions, you must not store that data or document it in any way digital or otherwise.

Businesses are often liable for losses customers experience due to compromised credit card data that occurs due to merchant neglect and lack of adequate data security measures.

Most credit card processing companies classify online businesses as “high risk”, since the potential for credit card fraud is higher than in-person transactions.  Operating a business online requires you have the ability to accept credit card payments from your customers, and unfortunately, some US businesses find it difficult to get a traditional merchant account due to their personal credit histories or the nature of their business being “high risk”.

Using US-based Processors

With a business based in the United States, you’re governed by the laws of the US as far as credit card processing is concerned.  If you use offshore credit card processing, the laws and limitations are lifted, you’re not considered a high-risk company, and you could benefit from a number of other advantages over using domestic companies.  When you begin to consider offshore companies, you have a wider selection of banking and financial institutions from which to use to process credit cards from antiscians.

Benefits: Offshore Credit Card Processing

Some of the advantages gained from processing credit cards with companies located outside the United States include:

  • Ability to accept a larger range of credit cards, including foreign forms of credit: when you can accept foreign credit, you immediately give your company access to a world-wide, global market.  While people in the United States have the most material belongings, they only make up a fraction of the total world’s population – and limiting your business to only United States consumers means you are missing out on many other potential sales.
  • Fraud protection offered by the provider.  Just as there are different laws regarding how a transaction is handled, fraud management is vital to ensure your transactions are secure and your business is protected from fraudulent transactions and the chargebacks that may result from disputed transactions.  An international processor will have the experience and expertise to handle these unique situations that come with accepting payments from around the world.
  • Able to help you stay within the bounds of international privacy laws.  Each country that you do business with may have varying laws regulating how private information is handled.  If you are unfamiliar with these laws as a business owner, your credit card processor can ensure your transactions are handled correctly and that your business is protected.
  • No transaction minimums or maximums to maintain
  • Possible tax-reduced transactions
  • No large set up fees, application fees or deposits.  Most off-shore credit card processing accounts can be set up with minimal investment.
  • Accept credit cards in multiple currencies and convert them to your own currency. Offshore providers can accept payments in global currencies and have them converted to your own when depositing into your account.

If you have found it difficult to get a credit card processing account with a domestic company, you may look to offshore companies.  Before selecting an offshore provider, make sure to compare their features and benefits, and let them know you’re doing so.  Many times, offshore banks will compete for your business by trying to offer a better deal than the competition.

Considerations: Using Offshore Processing Companies

As with any decision, there are potential disadvantages or circumstances to consider carefully before making your choice.  If you decide to move your credit card processing business to an offshore provider, you’ll want to consider the following:

  • Offshore banks may not be FDIC insured: other countries may have different types of insurance protection for your money.  Make sure you do some research into how your funds are protected if the bank is robbed or goes bankrupt before choosing a provider.
  • Check customer privacy laws: make sure the laws governing the banking industry where you are considering an offshore credit card processing account requires that your customer’s financial data is kept private.

Photo via Katey Nicosia

In these economically challenging times, it’s harder than ever to get a small business loan.  Almost every business experiences the need for some extra cash flow at one point or in another, whether it’s to even out a temporary lack of sales or to expand your business.  Even if you qualify for a small business loan, you may find it takes a month or more before you have the money in hand, and by then you could be in trouble!  What you may not know is that many credit card processing companies also offer cash advances to their clients.

Cash Advances Through Your Credit Card Processor

Many credit card processing companies will give their customers a merchant account cash advance.  You apply for the cash advance through your credit card processing company, similar to a loan, and if approved the money is deposited into your account to use for whatever purpose you need.  Some business owners need cash to even out cash flow problems, make payroll during a slow period, or to purchase new equipment or inventory.  You can apply for a merchant account cash advance for any financial purpose.

The credit card processing company then determines if you are eligible for the cash advance by looking at your credit card transactions.  If you have sufficient sales volume, they will approve your application and deposit the money for you.

Repayment of Processor Cash Advances

Merchant account cash advances are repaid from the money you receive through processing credit cards.  You will pay back a fixed percentage of every credit card transaction you make, with an agreement that the total loan amount will be repaid within a set period of time – usually about 12 months.

Paying back a merchant account cash advance based on a percentage of credit card transactions is ideal for business owners who may have fluctuating sales volume – since making a regular loan payment requires you have the same amount of money available each month to pay, where as a merchant account cash is a percentage of sales processed.  When your sales are lower, then the monthly payment you have to make is lower.  The payment arrangements of this type of business lending is a much lower risk for the business owner who just needs some additional cash, but isn’t sure how much of a monthly payment he or she can afford consistently.

Benefits: Business Cash Advances

Cash advances for businesses can alleviate any cash flow problems you may run into from time to time.   If you don’t have access to another source of funds if your sales volume decreases, you may be forced to reduce your inventory or lay off employees – or worse – go out of business.  Choosing a credit card processing company that can also provide a cash advance is a good idea for those lags in sales that could really cause your business to struggle.  You can deposit the advance into an account to use as a line of credit whenever your sales dip too low to pay your expenses and/or payroll.  Repayments will come out of your future credit card sales.

Potential Disadvantages

Despite the advantages and benefits of a merchant account advance, it is not without it’s potential disadvantages.  Interest rates on the money borrowed is generally higher through a merchant account advance than through a bank – but for many small business owners, a traditional bank loan is not possible so it may be worth paying a little more for access to the money you wouldn’t have otherwise.

If you’ve been looking to grow your business but need cash to get things going – a cash advance from your credit card processing company is convenient.  You get the money faster than a traditional loan and the payments are conveniently a percentage of your sales.

Reducing credit card processing fees has long been a challenge for merchants trying to save money.  The benefits of accepting credit cards as a method of payment are obvious in a society that relies heavily on credit.  Businesses that make this option available to their customers almost always see an increase in sales as a result.  This boost in sales does not come without a price for merchants.  With the privilege of accepting credit cards comes with credit card processing fees which can quickly add up.

Asking for minimum purchase with a credit card in the past

In the past, many small business merchants have tried to reduce these fees by requiring a minimum credit card purchase.  Most consumers are familiar with the practice.  Often appearing in hand written signs at gas stations or grocery stores, “$10 minimum purchase required for credit cards” policies are not uncommon.  What many consumers and in some cases even the vendor themselves do not realize is until recently this practice was actually in violation of the vendor’s merchant agreement.

New new rules for minimum purchases

As a result of the credit card reform, several aspects of credit card processing have changed.  One of which is the minimum purchase requirements set forth by businesses.  The major credit card companies no longer prohibit merchants from enforcing a minimum credit card purchase as long as they follow certain rules.

Visa has already changed their policy to allow merchants to require a minimum purchase amount for credit cards.  This minimum amount cannot exceed $10 and may not be applied toward transactions made with a debit card.  MasterCard has not yet officially changed their policy on minimum credit card requirements, however they plan to in the future.  American Express is also permitting minimum credit card purchase requirements as long as the merchant has the same minimum requirement for all credit cards.

This change in policy will impact both merchants and their consumers.  For the merchant, minimum purchase requirements help reduce credit card processing fees.  Merchants have to pay a fee for each transaction.  If a small business such as a gas station has many “micro” payments, for example using a credit card to pay for a soda or snacks, they end up paying more in credit card processing fees.

The effect of the new law to consumers

Consumers will be affected in another way.  Many people choose to not carry cash and make all or most of their purchases with a credit card.  This offers convenience and in some cases an easy way to track expenses for individuals who use their credit card for day-to-day purchases and reconcile their balance every month.  For these consumers, the minimum purchase requirement means they either have to buy more than they intended to meet the minimum or carry cash.  While this may not seem like a big deal, it does in fact limit options for consumers which may result in a loss of business for merchants who require a minimum payment for credit card purchases.

Merchants should carefully consider whether the money saved on credit card processing fees is worth the potential loss of sales if credit card consumers opt to take their business elsewhere.