Alternative Payment Methods: Why Retailers Should Care.

As a merchant, because your #1 method of payment is most likely a credit card, it’s worth your time to know how credit card processing works and how to compare various credit card processors.

Consider the following stats:

• 84% of adults in North America had a credit card in 2023, and 73% of North Americans get a credit card by age 25.

• The growth rate of global credit card holders grew from 1.1 billion in 2018  to 1.25 billion in 2023, an annual growth rate of 2.79%.

• The United States accounts for 214 million credit card holders, while Canada has 95 million credit cards in circulation.

• 70% of Canadians used credit cards for essential expenses like groceries and utilities in the past year.

If you’re part of the overwhelming majority of North American businesses that regularly accepts credit card payments, keep reading to learn how credit card payment processing works.

The parties involved in a credit card processing.

You know it takes more than you and your customer to complete a transaction — even though it may not feel that way because of how seamless the process is.

But you’d be surprised by how many entities are working together to maintain that seamlessness, – multiple entities working billions of times an hour, all over the world.

• The seller: That’s you, accepting the credit card payment in person, over the phone and/or online.

• The cardholder: That’s your customer. By qualifying for the credit card, they demonstrated an ability to pay for what they buy from you. The whole process falls apart if enough cardholders don’t live up to that responsibility.

• The acquiring and issuing banks: The former is your bank. The latter is the cardholder’s bank.

• The card network: These are the credit card brands you know. Some are “open networks,” meaning that they partner with issuing banks. Visa and MasterCard are two examples of open networks, which is why these cards are associated with banks. “Closed networks” issue their own cards and run everything through their own ecosystems. Examples of closed-network credit cards include American Express and Discover. The card network facilitates the transaction, talking to the issuing bank (or mining its own network) to authorize a transaction and then informs you of a complete or incomplete purchase, which you would then communicate to your customer (cardholder) via verbal confirmation or a confirmation screen on your website / POS terminal.

• The payment processor: The financial services firm that provides the credit card machines and routes the payment data to the card network and helps facilitate communications during a transaction.

• The payment gateway: The technology provider that maintains a secure connection between the merchant’s site and the processor.

How money moves within a credit card transaction with Credit Card Processors

Accepting a credit card payment starts a seven-step process:

1. You capture payment information via your point-of-sale (POS) credit card terminal or by a cardholder submitting their credit card information to your website.

2. Your payment processor picks up the card information from the terminal and routes it to the cardholder’s credit card network through the payment gateway.

3. The transaction data is sent to the issuing bank or network for authorization.

4. An authorization (or a decline) is sent to you, which completes the POS Terminal or online transaction.

5. If the transaction was authorized, the issuer puts the funds on hold and prepares it for transfer.

6. When you settle your transactions through your payment processor, usually at the end of the day, the issuing bank or network releases the funds to the acquiring bank (your bank).

7. Your bank deposits the funds into your account.

How credit card processing fees work.

Credit card issuers can collect fees on both sides of a transaction. The cardholder may pay user fees for the service of letting them defer payment on whatever they want to buy. And you pay an interchange fee, which is a percentage of every sale made, usually between 1 and 3%. The exact percent can fluctuate based on a few factors:

• The interchange fees can be slightly higher when a purchase is made online, over the phone or with a digital wallet because you’re not physically seeing the card, so you have no way of confirming the cardholder’s identity. This presents added risk, which is reflected in the higher fees.

• The interchange fees can be slightly lower for recurring payments, like, say, if you’re a raw ingredients producer and get regular monthly orders from your restaurant customers. Think of it like a volume discount.

• The interchange fees are also generally lower for charity and social service organizations.

How credit card interest processing works.

If you accept credit cards, you most likely also make business purchases using a personal or corporate credit card. So, it’ll probably be worth your while to know how credit card interest processing works.

Once a month, you’re presented with a credit card bill, and a minimum balance you’re required to pay within 14–28 days, depending on the issuer. If you don’t pay the full amount you’re owed by the pay date, you’re charged interest every day moving forward, usually between 20–21%. That number is called the APR, but it’s a bit misleading for two reasons: the APR is an annual rate, but interest is charged daily; and credit cards charge compound interest.

Case Study: Figuring out your daily interest rate on a $5,000 credit card balance, with a 21% APR.

• Step 1: APR (21%) divided by 365 days = 0.00058. This is your daily rate.

• Step 2: Daily rate (0.00058) multiplied by your balance ($5,000) = $2.90. This is your daily charge.

• Step 3: Daily charge ($2.90) multiplied by days in your billing cycle (30) 2.9 X 30 = $87. This is your interest payment.

• Step 4: Interest payment ($87) plus balance ($5,000) = $5,087. This is your new balance after one month.

But you’d actually owe more than that.

Credit cards charge compound interest, which means the calculation changes every day, and not in your favour: Over thirty days, the daily bump will get bigger, which will add to the overall debt load, which will increase the daily bump, and so on.

Why is it important to know how credit card payments work?

Two reasons. The first, which we touched on already, is because of how common credit cards are.

The second reason, and the more important of the two, is that small business owners are relying more on credit cards to fund their businesses. Equifax saw a 15% YoY increase in business credit card balances, compared to an 11% increase across other lines of credit. And since the B2B market is twice the size of the B2C market, you’ll most likely have other businesses buying from you using a credit card. This is why it’s important to know what you pay for the privilege to accept and use credit cards.

A final note about credit card payment processing and credit card processor

Earlier, we covered how common credit cards were. Their popularity no doubt comes from how easy credit card payments are, but the world is full of easier ways to pay, and more customers are expecting you to offer them all. That’s why more North American merchants are looking into solutions that offer a World of Payments™ — and why more merchants are considering OTT Pay.