Pay By Group University: Payment Processing for Card-Not-Present Merchants 101
The world of payment processing is a complex web of services, benefits, shortcomings, and costs. It can be difficult for merchants to decide how they want to process payments, what kind of payments they’d like to accept, and to understand how it all affects their business. Things get even more complicated for merchants who receive payments by means other than swipe-based point-of-sale credit card transactions.
The aim of this and future articles is to give merchants who deal in card-not-present ( or CNP) transactions the rundown on their payment processing options. We’ll help you make smart processing-related decisions and understand costs based on several factors: rates and fees, processing types, security, compliance, and the total cost of acceptance.
Before we jump into these factors, let’s cover a few basics of payment processing and build a solid foundation of understanding. First things first: in order to accept credit card payments, you’ll need a Merchant Category Code (MCC). This is a 4-digit number assigned by credit card companies that classifies a business by the types of goods and/or services provided. This helps determine your approval rates, rate qualification, and interchange amounts. Depending on your type of business, your MCC may qualify you for industry-specific rates.
Next up is a payment gateway provider. This is the means by which money can flow to and from your business in the form of credit card payments (and more). Gateway providers should be thought of as your business’s partner; you should carefully consider fixed costs and business-type-specific options to find the best match for you.
Something to keep in mind is that various credit card brands may cost more to process than others, but meeting all of a particular credit card company’s qualification requirements may defray these costs. Always check for hidden fees when choosing a gateway provider, including those related to account setup and other overlooked costs that can creep out of the woodwork.
Some gateway providers can bundle services together, and such integrated payment solutions lower the risk of redundant data entry errors by merging payment reconciliation with accounting and other business processes. This can reduce your costs, sometimes substantially.
It’s good to know who you’re dealing with when you make these considerations, so let’s take an introductory look at the players in the processing game:
Payment Facilitators (PayFacs) facilitate payments for sub-merchants, who are merchants that lack their own processing solution, by offering a suite of payment services including processing and funding. PayFacs aggregate sub-merchant transactions using sub-merchant ID fields and soft descriptors. This allows such merchants to accept credit cards without their own processor and/or gateway.
Payment Service Providers (PSPs) provide merchants with a single payment gateway through which they can accept multiple payment methods such as credit cards, direct debit, bank transfer, and so on. PSPs connect merchants to multiple payment networks & financial institutions and often manage these relationships on behalf of the merchant. They work in bulk and can often offer merchants cheaper rates and less hassle than dealing with such networks & providers directly. PSPs may also offer fraud & risk management for CNP transactions, analytics & reporting, and more. They’re often referred to simply as “gateways” but are usually broader in scope
Internet Payment Service Providers (IPSPs) offer all-in-one CNP processing solutions for e-commerce. Aggregate third-party processing solutions in a single account, giving merchants access to services and technology necessary to manage and protect payments end-to-end
Rates and Fees
Now let’s examine one of the major factors you’ll consider when choosing a payment processing solution: rates and fees. With any given payment processor you’ll encounter per-transaction fees. These depend on criteria like the processor’s evaluation of your personal and business risk, average order value for your business, your monthly transaction volume, and percentage of CNP sales.
There are three major ranges into which your transaction fee will fall. Knowing the type of transactions you need to process will help what kind of rates you’ll be charged and understand how much processing will cost you. The three are:
- Qualified rate: This is typically the lowest rate a merchant can receive, and is obtained by processing accepted cards using an approved processor.
- Mid-qualified rate: This is typically the next-lowest rate, often charged for manual-entry (rather than swiped) credit card transactions, as well as rewards and/or corporate cards.
- Non-qualified rate: This is the rate charged for all other transactions. It’s an increased rate due to transactions not meeting qualifying criteria and incurring greater risk. Slow authorization settlement and/or missing information such as a verified billing address can cause transactions to incur this rate, especially in combination with CNP entry.
There are additional rate classifications, but these are the big ones.
Some of the primary fees to consider are:
Interchange fee: This fee is set by the involved payment network (e.g. the Visa or MasterCard credit card payment networks) and covers fraud and authorization costs as well as potential credit losses. It can be calculated as a percentage of each transaction, or bundled with your overall rate. Merchants can request to pay interchange on occurrence rather than in a bundle to better track real transaction costs.
Several factors influence the interchange you’re charged: CNP transactions are usually charged higher interchange due to risk; premium credit cards usually carry higher interchange; standard credit cards have higher rate than signature-verified debit cards, which have higher rates than PIN debit cards; and payment networks generally charge lower interchange based on meeting certain requirements (e.g. card and/or business type). Your rate can be downgraded (i.e. increased) if some or all of these aren’t met.
Chargeback fees: These are incurred when a cardholder disputes a transaction and the funds from their transaction are returned to their bank or credit card balance, so you’ll lose the funds and have this tacked on to boot. It varies by provider and may increase if a merchant is slow to respond to chargeback inquiry, so it’s in your best interest to provide evidence in your favor as quickly as possible. Some, but not all, payment processors will refund the chargeback fee if the dispute is settled in your favor.
There are many myths surrounding chargeback fees, which we’ll address in an upcoming article, along with processing types, new payment methods emerging in the ecosystem, and more. Stay tuned!