Merchant Account Operation

Some businesses that accept credit and debit cards do not use their merchant accounts properly and they pay higher rates and merchant account fees because of it. Furthermore, many business people are not aware that they're paying higher fees because they seldom look at their monthly merchant processing statements.

The following section of this guide will bring to light the most common mistakes that business people make in respect to merchant accounts. When corrected, many businesses will save hundreds or thousands of dollars in lost processing fees.

The exact operation of your processing equipment will vary depending on the front-end processor handles your transactions. Each processor or bank has a unique program that they load into processing equipment that enables it to function.

Before we can tell you how to use your merchant account properly we'll explain how a merchant account works and what happens when you charge a customer's card. The process of transacting electronic bank cards is pretty complicated. In the interest of simplicity we've left some of the finer points out of this description in order to provide you with a fundamental understanding of how the transaction process operates.

When you transact a credit card by swiping the card through a machine, manually entering credit card numbers into a terminal keypad, or by passing numbers through an online gateway or wireless merchant account, you are initiating the transaction process. From start to finish the whole process takes only a few seconds, with most transactions reaching completion in well under a minute. After you run a customer's credit card, the processing equipment electronically transmits information about the transaction and the card that is being charged to the processor.

Your processing equipment will always send as much information to the processor as it can such as the credit card number, expiration date, billing address, amount being charged, and so forth. Once the processor receives the transaction information they'll send an authorization request to the issuing bank of the credit card to obtain an authorization. If the credit card has sufficient balance and the other information is valid, the bank issues and authorization code for the merchant to charge the customer's credit card for the amount that they have requested. This authorization is sent back to the processor who in-turn sends an authorization response to your credit card equipment letting you know that the transaction has been approved.

Here's where a lot of the confusion about credit card processing comes from. At this point you haven't actually charged the customer's credit card; you've only placed an authorization on their available balance. An authorization reserves the funds on a customer's balance to keep them from using those funds for other purchases and ultimately charging over the available limit on their account.

Once your credit card equipment receives an authorization the code for the transaction is stored in the terminal's memory. The credit card machine stores each transaction in memory in something called a batch.

At the end of each business day (or when you wish) you must close or clear your batch. When a batch is closed the credit card machine contacts the processor to transmit the batch. A batch consists of all of the transactions run since the last batch was closed, each identified by the authorization number that was transmitted to the terminal when the credit card was initially run. At this point the processor sends the transaction information to the banks to have funds moved from the customer's credit account to your bank account. This part of the process is called settlement. You will not be paid for credit card transactions until you clear your batch.

Credit card processors require that you close your batch at least once every 24 hours. If you fail to clear your batch at least once every 24 hours all of the transactions within that batch can downgrade to the non-qualified (highest) processing rate. When a credit card batch is not closed within the required 24 hour time period it's said to have expired. For example, if you process $1,500 worth of credit card transactions in a day at a qualified rate of 1.79%, and you leave work neglecting to close your credit card batch, that batch will expire.

When you return to work the following day and proceed to close the batch, the entire $1,500 worth of transactions will now be charged the non-qualified rate instead of the 1.79% it would have been charged if you had remembered to close the batch in time. Letting your batches expire can prove to be a very expensive habit.

Many providers offer a very convenient feature called auto-batch close. Auto-batch close is a command that is programmed into your equipment that tells it to automatically close your batch at a pre-determined time if you have not already done so. The batch is only closed automatically if there are transactions so that you do not incur unnecessary fees. Auto-batch is not available from all providers, and is not compatible with some machines, software, and gateways, but it's a great feature to have if possible. If you're interested in auto-batching be sure inquire about it with your provider.

AVS is a system that helps to combat credit card fraud by comparing the billing address of a credit card that is on file at the issuing bank with the billing address that a customer provides when they make a purchase. Manual entry of address verification information is not required for retail merchants, but is required for all card-not-present business types such as online or mail order.

If a card-not-present business fails to use AVS when running a transaction it will automatically downgrade to the non-qualified (highest) rate. Transactions will still be processed, and the funds will still be deposited, but the transaction will be penalized. Many card-not-present businesses are unaware of this regulation and don't know that they are paying a considerably larger discount percentage when they run transactions because they are not using AVS.

Different types of credit card processing equipment will handle AVS differently, but every card-not-present business should make sure that AVS is built in to their equipment's programming. If you are not sure if your equipment is performing address verification, we strongly recommended that you contact your provider to verify that it is in fact being used. Not only will AVS save you money it is also a valuable tool that helps to combat credit card fraud.

AVS operates by comparing the billing address on file at the issuing bank with the address that a customer provides when they place an order. Your processing equipment will let you know if the two addresses match by displaying a "Y" if the addresses match or an "N" if they don't. Credit card terminals will print the "Y" or "N" directly on the credit card receipt and gateways and processing software will display it on screen.