How Understanding Customer Credit Card Processing Can Improve Your Cash Flow

There are three important questions you should ask regarding your customer credit card processing:

  1. Did I receive all the money from every sale processed as a credit card payment?
  2. What is the credit card fee cost for each service or item that I sell?
  3. Have I accounted for payment gateway and merchant processing fixed fees and other hidden fees?

Credit card processing seems very simple, because it’s all done in the background by computers and third parties. But the reality is that getting the funds from your customer to your bank account via a credit card payment is complicated. Several connections and transfers take place, and each connection and touch point has a cost.

  • The credit card payment process begins when the customer presents her credit card for payment and you capture the card info. This could be via your store’s terminal or mobile card reader, or it could be via your website.
  • As soon as the customer card’s info is captured, it is sent to your payment gateway. The payment gateway validates the customer’s card information and then sends the transaction to your merchant processor. Sometimes the payment gateway is bypassed when physical point of sale systems or EMV devices (chip cards) are used to capture the card data.
  • The merchant processor then sends data to the credit card network (Visa, Mastercard, Discover, AmEx, etc.), and the credit card network sends the data to the customer’s credit card issuing bank. For example, if a customer is using a Citicard Visa, your merchant processor sends the data to Visa, and Visa sends the data to Citicard for approval. The merchant processor then sends data back to the entry point in #1 above so that both you and the customer can see that the transaction has been approved.
  • The payment gateway and the merchant processor then have to communicate once more to batch the day’s approved credit card transactions for funding to your bank account.
  • After batches are formed for each credit card network, the merchant processor then settles each transaction with the corresponding credit card networks and forwards the results to the acquiring bank (your business bank account). The acquiring bank is responsible for underwriting the risk of your credit card payments as well as depositing funds and debiting fees. The merchant processor and acquiring bank may be the same. For example, if you bank at Bank of America and use its merchant processing platform, they are the same.
  • The final step is that your merchant processor takes money from the customer’s credit card issuing bank and deposits the funds into your bank account. This requires yet another network to be involved, the Automated Clearing House (ACH).

There are many different payment systems in use, and sometimes vendors do more than one step. For example, your payment gateway and merchant processor may be the same, or your merchant processor and bank account may be the same.

Once you understand all the vendors involved in your credit card payment system, follow the steps below to make sure all your sales are deposited into your bank account.

  1. Make sure all sales receive credit card approval. Put a system in place that prevents the delivery of your services or items to a customer if a credit card payment has not been approved.
  2. Pull reports from your sales system and from your merchant processor at the end of each day and reconcile the amounts between the two.
  3. Pull reports from your bank account at the end of each day and reconcile with the merchant processor reports.

To illustrate further, numbers 2 and 3 above require a three-way reconciliation as follows:

Sales —> Merchant Processor —> Your Bank Account

The reconciliation in Step 3 will be next to impossible if your merchant is taking its fees out of every batch. ONE OF THE MOST IMPORTANT SET UP REQUIREMENTS TO ENSURE YOU CAN AUDIT THE CREDIT CARD SALE PROCESS IS TO FIND A MERCHANT THAT WILL PUT YOU ON “GROSS RECEIPTS.” This means the merchant will deposit to you bank account 100% of the sale, i.e. the merchant will NOT take its fees out of your daily deposit batch. Instead, the merchant debits your bank account at the end of each month for all of its fees. If your merchant will not put you on “gross receipts,” then change merchant processors.

After you understand your credit card processing cycle and have put steps in place to audit it, you need to then understand the merchant’s rules and policies for fees and audit the fees each month by viewing the merchant statement. If you don’t receive a merchant statement, make sure you can access one online and make sure to save it each month. If your merchant does not provide statements, change merchants.

Don’t treat your credit card processing system as a mystical process that you can’t understand. Take responsibility for the most important part of your cash flow – incoming cash! Credit card processing┬ásystems involve a lot of players with agendas that are very different than yours. By understanding and auditing the system, you will be able to ensure you are receiving all funds due you and are being charged fees in accordance with your merchant agreements.

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