Underneath the smooth, streamlined surface of a credit card sale, there are many components. To start, there are four elements to each transaction: the merchant, the acquiring bank, the issuing bank and the customer. The merchant is the business or store owner who provides a good or a service. The acquiring bank is the store owner’s bank for their merchant account. This bank provides the processing services needed for the transaction. The issuing bank is the bank that issued a credit card to the customer.
Once a transaction is authorized, the issuing bank loans the money involved in the transaction to the customer, who will then either pay it off in the grace period, or add it to their balance and pay it back with interest later on. The acquiring bank then makes a loan to the merchant, and the money becomes available in the merchant account. Both banks charge a series of fees, meaning that the amount available to the merchant is slightly less than the amount charged from the customer.
The fee charged by the issuing bank is known as the interchange fee, while the main fee charged by the acquiring bank is known as the discount rate. The discount rate may or may not be accompanied by other fees, depending on the type of merchant account used in the transaction. Both the discount rate and the interchange fee are calculated as a percentage, but there may be other fees involved which are calculated as a fixed sum.
Information regarding many of these fees is publicly available, while the interchange fee depends on several factors including the presence of the card at the time of the transaction, the type of card (whether it is a reward card, or a card used by the government), and the type of merchant that accepts the card. Interchange fees also take into account the risk of a chargeback, meaning that your industry is taken into account. A chargeback refers to a customer-initiated bank refund, which comes with extra fees and charges for the merchant.
If a customer is not satisfied with a good or service, he may initiate a chargeback. If the chargeback is successful, the acquiring bank will withdraw the payment from the merchant account as well as a chargeback fee. Chargebacks can be appealed, but the process may take a long time, and may still involve chargeback fees, and ultimately may or may not prove successful.
Some industries are more likely to be plagued by chargebacks. Any business that operates online or over the phone is not able to showcase the product upfront, which increases the risk of customer disappointment and dissatisfaction with the transaction. Businesses that operate on a physical location are less likely to encounter chargebacks. The safest businesses are those that offer standard goods and services, which is why car rental agencies, restaurants and gas stations typically receive the best credit card rates and fees.
For more information on the nuts and bolts of a merchant account or to sign up for a merchant account, please call (888) 924-2743 or go to Charge.com.