How does credit card processing work
If you want to sell product or service through the first thing you need is a system where you can accept the payment in real time. And the best solution for a real time payment is accept approved credit card instantly .
Selling goods and services on the Internet presents its own set of challenges -- like how to set up and maintain a secure, reliable, cost-effective system for authorizing payment and managing transactions. If you don't know what you're doing -- and even if you do -- that can be difficult, complicated, and expensive.
High security base transaction software takes care many complex issues for you,but it is you who going to control the transaction process over the net. You need a credit card merchant account. an automated payment system, a credit card merchant account, and a computer with an Internet connection. You can do everything with your Web browser.
What is a merchant account:
A merchant account is a account with a bank that is a member of the Visa and MasterCard associations. Such a bank has been certified by Visa and MasterCard associations and can provide you, the merchant, with all of the services related to your merchant account. Once your merchant account is setup and "live" on the credit card system, you can start the real time processing of credit card.
What is Real Time Processing ?
A real time credit card processing system is a transaction processing system that functions as a payment service using a secure transaction server on the Internet. Merchants with a valid merchant account can use the system to submit, authorize, capture, and settle credit card or eCheck transactions without the need for a separate transaction terminal or processing software
So from where can I setup a merchant account ?
Here is the list of some company who will give you the service of establishing merchant account.
Do I always need a dedicated merchant account?
Here is list of some company from where you can take service for you e commerce without establishing a merchant account .
OK I finished all the procedure but I still don't understand how it works?
A customer presents their credit card for payment.
Using their credit card number, you 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. Traditionally, one would submit this request by swiping a credit card through an electronic transaction terminal provided by the bank. With the system, this request is provided electronically to our payment gateway servers, which then route the request along the processing network.
The processing network immediately receives your electronic request and determines if the cardholder's account is valid and if the funds are available. If they are, the processing network returns an electronic response to your terminal or computer. This response is called an "authorization code", and is your guaranteed authorization to capture the funds. Typically, this code is a six-digit number. The transaction and its associated authorization are stored in a "batch", where other transactions for that day reside.
You print a receipt for the customer using the electronic terminal or your computer and the customer signs the receipt. As far as the customer is concerned, the transaction is complete. As far as you the merchant are concerned, there is one more step to complete the transaction.
At the end of your business day (usually), a final request is submitted to the processing network to go ahead and "capture the funds" that you obtained
authorizations for during the course of business that day. This is called "settlement" or "settling your batch". With a traditional physical credit card swipe terminal, this settlement process must be initiated manually. One of the key advantages of our system is that this settlement process is initiated automatically every day on our end.
At settlement time, the processing network immediately receives your response electronically and determines if the capture amounts contained in your request match the authorizations for each item. If so, the request is granted and an "Accepted" response is returned to your electronic terminal or computer. A settlement report can be printed showing the grand totals by card type (Visa, MasterCard, American Express, Discover, etc.) for the settled batch. Note: any corrections to your batch, such as voiding a transaction, must be made prior to settlement.
Within 48 to 72 hours (usually), the funds associated with the batch you settled are deposited electronically into your business bank account. Typically, the discount rate you pay to your merchant account provider are deducted from the deposit before it transferred to your bank account, resulting in a "net deposit" of funds.
At the end of the month, your merchant account provider will mail a statement to you, detailing the credit card activity for the month and the associated fees you have been charged for such.
Now that you understand the basics of how a credit card merchant account works, you can see the role that the system has in the processing of your credit card transactions.
Understanding your merchant provider's rates and fees:
All banks and merchant providers require "transaction fees" from you for accepting credit cards. Typically, these fees are broken down into 3 categories: a discount rate, a transaction fee, and monthly fees.
For the bank's purposes, a transaction is usually defined as any communication between you and the processing network. A "credit" transaction is treated the same as a regular transaction. Settling a batch is usually considered a transaction as well, as it involves communication with the processing network.
This is the percentage of the total transaction amount that the bank will usually deduct prior to transferring your deposit into your bank account. Typical discount rates range from 2.5% to 5%, depending on your type of business and other factors. A higher rate may be charged on individual transactions if the transaction doesn't conform to certain qualifications, as described by your bank or merchant provider. For instance, accepting a "Visa Business Card" credit card may cost you 1% more than regular transactions. The reasons for these non-qualified transaction surcharges and complete details on all transaction
qualifications should be discussed with your bank or merchant provider. Address Verification (AVS) may also fall into this category when not used properly. Address Verification (AVS) is described in the
Developer's Guide of the merchant account provider.
This is a flat amount that you pay for each transaction. Typical transaction fees range from 30 cents to 50 cents per transaction.
These are fees charged for other account related services, such as customer service, your monthly statement, network access fees, and minimum monthly fees.
All the fees and charges are required to be disclosed to you prior to your commitment to the merchant agreement between you and your bank or merchant provider, All the fees and charges are required to be disclosed to you prior to your commitment to the merchant agreement between you and your bank or merchant provider, and are usually enumerated carefully to you in the merchant agreement itself.Source: brightcentral.net