How Credit Card Processing Works - Transaction Cycle & 2 Pricing Models

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are you confused about the rates and fees and higher being charged if so this video will explain how it all works you need to know every little detail about credit card processing you just need to know enough to delegate task to a provider that will take care of everything for you is important to understand the fundamentals so that you can probably make a provider selection in the next couple minutes we'll discuss how it works and its role in the process the two main pricing structures and how they compare to each other and at the end I'll give you a couple ideas on how to best select or provide that fits your needs of the transaction cycle first for purchase of goods or services after the car into the point of sale software the
processor sends out for authorization through the payment processing network bank approves or declines the transaction based on funds available networks to the processor and the approval code is liver to the point of sale device at the merchant location for the purchase that was made this whole process is completed in dust a matter of seconds at the end of all of their transactions referred to as a batch to the processor for money to be deposited into the merchant bank account and finally the issuing bank will send the card holder a bill for the purchase what is interchange and what role does it play schedule fees that determine price for all credit card transactions there are hundreds of interchange levels in qualification requirements that must be met in order for a transaction to fall into a certain category the two main qualification requirements are number one accepted whether its face to face or over the phone for example and the second is the type of card that is used whether its a consumer card worth his card for example individual rate categories are set by Visa and MasterCard and the interchange schedule fees are published and could potentially change two times per year this is important to remember since those changes can affect the cost of your merchant account of just one part of a schedule of fees published by visa as you can see there are 13 rates and eight categories on this example alone again in any single transaction just one of these rates are charged based on the qualification of the card that was presented let's look at two main pricing models and the components of all of them most providers will off of the following price structures number 1 racing also known as bundled or bucket pricing and the second is interchange plus also known as cost plus or pass through pricing in order to compare these two price of us first look at how the true pricing structures are related first off interchange parts are at the core of bulk pricing models the fees for any given transaction are broken down into two main categories interchange cost along with Jews in Assassins and processor cost estimates are paid to the Cartoon Network's Visa and MasterCard and are the same for everyone as are interchange cost their absolute and every processing company pays the same amount for interchange dues and assessments. They cannot be changed or discounted for special situations or for any reason so whether you're a fortune 500 company processing billions of dollars each year or a hobby business with just a couple thousand dollars in volume you pay the same fees from now on when I refer to interchange it is assumed that of all of the rates and fees that fall under that two year interchange plus pricing passes the actual interchange cost through to you and a small provider charge is charged in addition also referred to as provider markup this fee varies widely based on a variety of factors and can range from five basis points up to 1.5% or higher gears a simple transaction refer to the visa interchange chart that we looked at earlier and let's compare a single transaction at a qualified rate of 1.79 under a chair base program to an interchange plus pricing program with a processor cost of 20 basis points assume the following for the transaction the interchange costed 1.6 5% plus a $0.10 transaction fee and we use a hundred dollar transaction as the sample dollar amount given those two variables we know that the actual cost of the transaction is $1.75 for the interchange plus pricing model you have a 20 basis point provider cost added to the $1.75 actual cost bringing the total to $1.95 for the chair base pricing model you have that seemed base cost of $1.75 but in order to get the total cost for a two-base pricing model you simply multiply $200 times 1.79% rate assigned to that level to get the dollar and $0.79 total cost as you can see interchange cost is at the core of each of these pricing models and with any pricing model for that matter and is paid one way or another so in this example you can see that with the interchange plus pricing model your total cost is $1.95 compared to the $1.79 with the chair base model you can see that only a small piece of the total fee is paid to the processor as most of the fee is sent back to the issuing bank provider costs are collected for the purpose of paying network fees other general business costs such as administrative expenses associated with account servicing application approval and costs related to licensing the electronic payment networks for each transaction the same calculation is done depending on the pricing model that you currently paying its widely assumed that interchange plus pricing is a better pricing model because I said to have a true cost or a transparent pricing model but does not necessarily mean that it's a lower overall costs variable such as average ticket and the number transactions processed each month in addition to the pricing structure variables that we discussed already determine whether tier or interchange plus pricing is best for your company merchant account pricing is not one size fits all in the end what matters most is the total dollar amount in fees paid for accepting a certain dollar amount of credit card​