Nowadays, credit cards are a commonly used credit instrument which many of us use for financing our daily needs. Especially with the impetus to go digital, this form of plastic money is gaining prominence. We easily reach out to our credit cards for making impromptu or planned expenses. But how often do we wonder how a credit card actually works? It is important to know the mechanism of a credit card, because it is ultimately a form of debt that needs to be repaid with interest. Let’s start with knowing how credit cards are processed.
What is Credit Card Processing?
The method in which your credit card payment happens to a merchant is credit card processing. How credit card processing works is not a complex process, but it is important to know to be able to find the best credit card processing bank or financial institution that provides you financial gain. Once you swipe your credit card for a purchase, a number of credit card processing steps are activated to make the payment happen. Firstly, the transaction information is conveyed by your processor to the issuing bank, which in turn sends back an authorisation through the card network or the merchant.
The intermediary parties here that aid this process are the credit card processing services or acquiring merchants. The role of this intermediary is to get into contract with sellers to create and maintain accounts (called merchant accounts) that allow the business to accept credit and debit cards. This acquiring bank also provides sellers with the required equipment and software. They can therefore accept cards as a mode of payment, and handle customer service related to cards.
Here is a commonly seen list of credit card processing companies:
- Traditional companies like VISA and Mastercard
- Credit card processing online through merchants such as PayPal, HELCIM, payline, etc.
Why Should You Know About Credit Card Processing?
Generally, as a customer you may not even think about how your credit card payment is being processed. However, it is important to thoroughly know the credit card processing business because credit card processing fees may be incurred depending on the merchant involved and other factors. Moreover, if the card payment is declined, there may be certain processes you may need to follow. It is best to stay informed and beware of aggressive sales tactics, lack of transparency and surprise fees. Basis points is one basic concept you need to know and check while assessing credit card processing reviews.
What is a Basis Point?
In financial terms, one basis point is typically 1/100th of one percent. Similarly, in credit card terms, a basis point is an incredibly small percentage which is used to calculate every credit card transaction. It is referred to as “bp,” pronounced as “bip,” and more than one basis point is abbreviated a “bps,” pronounced as “bips.”
Let us understand its application better with an example- If your processor charges you a rate of 100 basis points, then you need to convert that into a percentage by multiplying 100 by 0.0001 (100 X 0.0001), amounting to 0.01 or 1%. This basically means that your processor charges you transaction fees of 1% of the transaction value. This is relatively easy to know; however, complications arise when the basis points are variable.
How do Basis Points Change?
Depending on whether a credit card transaction meets or does not meet certain pre-defined criteria, the basis points factor may change. Some of the common factors are:
- A transaction payment is not settled within 48 hours.
- The transaction amount does not match with the amount that the merchant provider authorised.
- Details are not verified, for example the address does not match the registered address on the card.
- There is a physical fault with the magnetic strip on the card, it is not working and transmitting information.
These factors may lead the transaction to fall in a mid-value range, which would fall under a higher basis points range. You will then need to pay higher amount than the usual for such transactions. Sometimes, companies also apply surcharges on the standard basis points range, making it expensive for you to pay. It is therefore important to be on the lookout for such “traps” and choose the best online credit card processing medium that suits you and the seller.
Credit card transactions can be a tricky affair, with costs adding on without you even coming to know. It is wise to be prepared beforehand by gaining some financial acumen, one of which is basis points. This can help you make the most of your credit card for your expenses, without falling prey to unnecessary overpayments.
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