How Credit Card Processing Works – Merchant Services 101

 In Business

Here’s the in’s & outs of credit card processing

When I first got in the credit card business, the merchant processing and merchant services business, it was almost 15 years ago now.  I started looking at these credit card statements, and I have to honestly say I thought I was reading Chinese!  They make it about as complicated as they possibly can.  You look at these rates and these fees and it just goes on and on.  It literally took me 6 to 9 months to learn it and figure out how this stuff actually works.

So I’m going to tell you today, after having been in the business many many years, helping a lot of customers and helping a lot of businesses save money by cutting their rates and understanding their rates and understanding their fees better.  We spend a lot of time educating people, just showing them how all this stuff works.

Basically Visa, Mastercard and the other major card brands are monopolies number one and number two, obviously there’s a lot of credit card fraud out there. Those are the two main reasons why there’s so much regulation and why the government has so much to do with how the rates work.

credit card processing

Here’s a brief run through for a typical transaction:

When you run a credit card through a credit card terminal or through a point of sale system each transaction will hit four companies within about 5 Seconds.

  1. It hits Visa Mastercard, obviously depending on the type of card, whether it’s Visa, Mastercard, Discover or American Express.
  2. It then hits us, your processor, First American Payment Systems
  3. Then it hits the card issuing bank, that’s whoever issued the card whether it’s Wells Fargo, Capital One, US Bank or whoever issued that card
  4. Lastly it hits your bank (whatever Bank you want the money to go into as a Merchant.)

So those are the four companies that it will hit within about 5 seconds and then it spits back an approval code. That six digit code says that the card went through and there’s enough money on it. And that’s when you’re golden as a merchant, or a business. That’s what you want, that six digit code, and you know it went through.

There Is Still A Risk:

However, that alone doesn’t guarantee you the money. Every card holder, every consumer has the legal right to dispute any transaction from the date of the transaction up to six months. So let’s say somebody comes to your place and let’s say you have a restaurant, that somebody comes to your restaurant swipes their card at your restaurant for $42. It goes through and you get that 6 digit approval code.

But let’s say three months down the road the card holder or the card owner looks at their statement and they see the transaction at your restaurant on that date and they’re like, wait a second. I didn’t do that. I didn’t go to XYZ restaurant. They can literally call up their card issuing Bank. Whoever issued them that card and say “hey, I didn’t run this transaction what’s going on?”

That card issuing bank will immediately pay them back, and then the card issuing bank comes to you and asks you to provide them documentation for proof. You’ve got 10 to 15 days to provide them, through your processor, the documentation proving that this person came to your restaurant and that you served them food or whatever. You then have to scramble and get all the documentation and proof you can find. Anything that you have, to show that this person came in. That you’ve rendered them services or that you gave them a product and that it was a legitimate transaction, but the burden of proof is on you as the merchant and that’s the way Visa/ Mastercard set it up.

So that’s why it’s very important that you check their driver’s license and make sure it’s the same name that appears on the credit card they gave you. Make sure you keep all of your receipts, signed or not, also, if you’re doing any sort of contractual work or any contractual services make sure you have them sign a contract, you can keep that contract on file as well as your receipt as both of those would be your proof that can help you in regard to a dispute, or what’s called a chargeback or a retrieval. When they ask you for that documentation it’s called a retrieval request. They’re asking for the documentation, they are retrieving that documentation to prove whether or not that transaction was legit.

So, lets say, you send in all that documentation to prove that it’s legit, there’s still a chance that it won’t win that chargeback for you. There’s still a chance that you could still lose that money. That is a chargeback.

How To Play It Safe:

Banks could still pull it out out of your account if the card cardholder disputes it up to six months from the day of the transaction. So, it’s very important to:

  • Keep good documentation.
  • Keep good track of that documentation so that you can fight off those disputes and chargebacks.
  • Check the driver’s license and make sure it matches the name on the card.
  • Make sure it’s a legit transaction.
  • Make sure that the cardholder is who they say they are.
  • Check the signature.

    Also Read:
    3 Credit Card Processing Mistakes That Will Cost You Money

Settlement/ Batching Out:

Here’s some tips for you and a little more about how credit card processing works. Once you get that six digit approval code, then it will go into a settlement process, I call it batching out. Let’s say you get five transactions in a day. You’re not going to get five deposits in your bank account. You get one deposit for that day. It’s called a batch and that batch has all of your 5 transactions in it. That batch is then settled into your bank account as an ACH deposit.

Now, some machines, POS systems, software systems and gateways may not be set to auto settle and you are having to batch/settle them manually, if you forget to batch or settle them those transactions with the 6 digit approval code will just sit there and those transactions are not going to hit your bank. You might get approval codes, which typically lasts up to 30 days but they won’t deposit into your bank account.

To avoid this from happening you should always have your terminal, POS, software or gateway set to auto settle, that way you can get that money within 24 to 48 hours typically. Some Banks deposit immediately so you see that money in your account the next day, However, most banks wait till midnight of the following day before they process that ACH data.

That’s why we at First American, say 24 to 48 hours. We can get you next day deposit given that you meet some certain restrictions and guidelines such as you’re swiping most of your cards and your able to batch out before a certain time, usually by 8 p.m. or in some cases 10 p.m. on certain networks and depending on what time zone you’re in, but we can get you next day deposit in a lot of cases at First American! It also depends on your merchant services provider if you’re not with First American. You know, they should be able to set that up to automatically batch out so it will hit your bank account within 24 to 48 hours, but that’s the key, batching/settling before that cut off time.

As you can see, there’s a lot of puzzle pieces that need to be in place and a lot of things that have to happen right for that money to go from your terminal or system to your bank account within that short period of time. there is also a lot of pieces that go into doing your due diligence to make sure you’re keeping track of all of your records, in case there is a dispute or heaven forbid, a card holder who is setting you up for a chargeback or a retrieval request and saying hey I didn’t run this transaction. Then you can have your ducks in a row and have all your documentation in place so you can fight off that chargeback. That’s another reason to make sure you have a good merchant services provider/ good credit card processor such as first American Payment Systems.

First American Payment Systems Goes To Bat:

Now, we at First American payment systems, unlike a lot of processors, will actually go to bat for you during those 10 to 15 day period and they will try to help you win that chargeback and try to fight off the card issuing bank. Because, after that 10 to 15 day period is over the card-issuing bank will literally pull that money out of your account. They’ll rip it right out of your bank account.

So you gotta be careful. You got to make sure you have your ducks in a row and you’re keeping good documentation on those customers because any cardholder has the legal right for six months from the date of the transaction to dispute that transaction. So just because you got the 6 digit approval code and just because it went through the settlement and ACH process overnight and just because you got that money. That doesn’t mean you’re guaranteed to keep that money. They could still pull it out if the card card holder disputes it from six months from the date of transaction.

So it’s very important to keep good documentation and keep good track of that documentation, then you can fight off those disputes and chargebacks. Also, make sure you have a good merchant services provider a good credit card processor such as First American Payment Systems who will go to bat for you, who will fight for you, and who will try to help you win that charge back and help you fight off the card issuing Bank from taking that money. It’s very important that you have somebody for credit card processing that’s going to help you and take care of you. We’d love to be the one to help you with that.

Best Service You’ll Ever Get:

You can call us or text us any time with our free 24/7 cell phone support on credit card processing. Obviously, if you’re in our area, (Lincoln, Omaha and surrounding areas as well), we give free on-site support to our merchant services/ credit card processing customers. And obviously you can always call or text us anytime as well, even if it’s three o’clock in the morning, if you need us, we want to take care of you and make sure you’re good to go.

It would be great to hear from you and great to see you guys. Hope you enjoy the rest of your week and enjoy the beautiful weather we’re having this fall and please, call or text us anytime.

Also if you want our FREE EMV mobile chip card reader CLICK HERE

We are looking forward to talking with you soon, and we can’t wait to talk to you next time on our blog here at first American.

Have a great and wonderful day… Everyday.

We’ll talk to you soon.

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