Credit Card Processing Blog

From a merchant’s point of view, face-to-face and e-commerce transactions are similar in that in both environments the payment information is electronically collected by the merchant’s system. In the former instance the data processing is performed by a point-of-sale (POS) terminal, which reads the card’s information following a swipe, while in the latter the task is performed by the merchant’s payment gateway, following the customer’s manual entry of her payment information on the merchant’s website.

But how do you accept your customer’s payment, if her credit card information is verbally given to you over the phone or electronically by fax or via email? Well, that’s when you need a virtual terminal. Here is what you need to know about this payment processing service and how to use it.

Virtual Terminal Basics

Virtual terminal is the web-based equivalent of the physical POS credit card acceptance machine. It performs exactly the same function, which is to collect the transaction information, encrypt it for protection against hackers, transmit it securely to the processor and then communicate the processor’s authorization response back to the merchant. The only difference is that, rather than reading the customer’s payment information from her card’s magnetic stripe or chip, the virtual terminal does it from a payment form, which is filled out by the merchant in a browser. In that respect, the virtual terminal resembles an e-commerce transaction processing set-up, except that in the latter case the payment form is filled out directly by the customer.

So it can be said that, when making an e-commerce payment, the customer is doing it through a simplified version of a virtual terminal. The only difference between making an online payment for yourself and doing it for a customer of yours is that in the first instance you are charging your own card, while in the latter you are billing your customer.

A great thing about virtual terminals is that they can be accessed from anywhere internet connection is available, either from a computer or a smart phone. You can set up multiple user accounts for your employees and assign different levels of control.

Some virtual terminals allow you to accept ACH (e-check) payments, in addition to bank cards. However, not all of them do, so if you need e-check acceptance, be sure to ask your prospective processor if their system supports it.

Recurring Payment Support

Some merchants’ business models are based on delivering products and services on a pre-determined schedule (weekly, monthly, etc.) over time. For instance, a car insurance policy is typically paid in monthly installments of pre-defined amounts. These are known as recurring payment plans and can last until the payment plan is canceled by the customer. A similar type of a plan can be set up for the payment of, say, a TV set. In this case, however, both the number of payments and their amounts are pre-determined and the plan is automatically discontinued after the last payment is processed. These are known as installment payment plans.

The virtual terminal is the best platform for setting up and managing recurring and installment payment plans. It enables you to create customer profiles by storing their payment information securely on your processor’s server. Then you can use the managed billing service that is built into the system to manage your customers’ payment plans.

Who Are Virtual Terminals For?

Virtual terminals are designed for everyone who accepts payments in a non-face-to-face environment. That includes e-commerce businesses, which sometimes need to process a payment that a customer has called in for some reason, rather than made online. Conveniently, all major payment gateways feature a built-in virtual terminal.

Yet, the primary virtual terminal users are mail order and telephone order (MO / TO) merchants, which accept payments exclusively by phone or mail. Virtual terminals are also the preferred payment processing platform for most non-profit and membership-based organizations, either exclusively or in combination with an e-commerce set-up.

The Takeaway

If you don’t meet your customers in person or do not operate an e-commerce website, you need a virtual terminal to accept payments. Typically, the most cost-effective approach would be to have your processor provide both the merchant account and the virtual terminal. Keep in mind that all major virtual terminals out there have the same capabilities, so there is no reason to overpay for any one of them.

Image credit: Real Simple.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).

We write about a lot of payment card industry-specific staff here on this blog: services, systems, products, best practices, etc. We try to explain, as best we can, how the credit card processing world functions and, more to the point, where your place in it is. Some of the things we write about you really, really need to understand very well, others you need to have at least some basic knowledge of, while still others some of you can do perfectly well not even knowing of their existence or meaning.

The system that I will review in this article falls squarely into the first of the above categories. It is Visa’s payment system, the biggest payment processing platform in the world and the one that is likely to handle the majority of your card transactions.

What Is Visa’s Payment System?

Visa’s system includes technology, products, services and marketing programs that facilitate the electronic exchange of information and funds among financial institutions, merchants, consumers, businesses, non-profits and governments. Visa defines the rules that enable financial transactions to be completed safely and reliably, including functional and technical specifications.

Who Participates in Visa’s Payment System?

The following entities take part in each transaction facilitated by Visa’s system.

• Merchant – an entity (business or non-profit) that is authorized to accept Visa-branded cards for the payment of products and services.
• Acquirer (also known as a merchant bank) – a financial institution and a Visa member that contracts with merchants to accept Visa cards for the payment for goods and services.
• Cardholder – an authorized user of Visa cards.
• Issuer – a financial institution and a Visa member that issues Visa cards for use in transactions and enters into agreements with its cardholders for the billing and payment of these transactions.

Visa Payment Transaction Flow

Here is how each of the above entities participates in a Visa transaction:

1. The cardholder presents the merchant with a card for payment. The card data are read directly from the card by a point-of-sale (POS) device, key-entered into it by the merchant or provided by the cardholder on the merchant’s website or over the phone.
2. The merchant transmits the transaction information to the acquirer.
3. The acquirer sends a transaction authorization request to Visa.
4. Visa sends the authorization request on to the issuer or, in certain circumstances, it may perform “stand-in processing” on behalf of the issuer and approve or decline the transaction.
5. The issuer sends back to Visa an authorization response, either approving or rejecting the transaction.
6. Visa sends the authorization response on to the acquirer.
7. The acquirer routes the authorization response to the merchant.

Visa Payment Process

A typical Visa transaction involves three stages: authorization, clearing and settlement:

1. Authorization is the process of approving or rejecting a transaction by the issuer.
2. Clearing is the process of transmitting final transaction data from acquirers to issuers for settlement. During this stage are calculated the fees and charges that apply to the transaction.
3. Settlement is the actual exchange of funds between acquirers and issuers for all transactions that are cleared.

The Takeaway

Visa’s payment system may handle more than a half of all of a typical merchant’s card transactions. The payment processing tools may vary from one merchant to another and will depend on the transaction setting, but all of them will involve the same principal entities (some transactions may feature one or more additional participants) and will be processed following exactly the same sequence of interactions as described above. You should learn the dynamics of this process and educate yourself on how to best perform your own duties. We have written quite a few articles, guides and manuals to help you out.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).

Credit card transactions can be processed in batches at the end of the day or in real time. The method selection is dependent on the payment acceptance environment, the processor’s capabilities and on local requirements. The transaction information can be captured either at the point-of-sale (POS) device or at the processor host.

In this post I will offer a cursory overview of the two processing methods.

Batch Processing

Batch processing (also known as batch clearing) involves the exchange of transaction information twice, which is why it is also referred to a dual message processing. In dual message processing, the authorization occurs at the time of the transaction, through only one message and then the clearance is done later through another message.

The clearing messages from the daily transactions are typically collected into a batch for the POS devices. At the end of the day the batch is sent to the processor as part of the end-of-day processing. Device-capture and processor host-capture systems typically use dual message processing.

Real Time Processing

In real time processing all transaction information flows online. If the final amount is known at the time of the authorization request, the same online message also provides the issuer with all the data needed to clear the transaction and post it to its cardholder’s account. This is why real time processing is also referred to as single message processing.

Real time processing merchants, specifically those in the travel, lodging and entertainment industries, can use an authorization message followed by a sales completion, instead of a full financial message. If that is the case, the process is very similar to the dual message one.

Batch and Real Time Processing Considerations

Gas stations and other card acceptance environments, where the final transaction amount is not known at the time of the authorization, typically use batch clearing. Those that use real time processing instead, request a status check first, followed by a clearing message when the final amount is known. Unlike batch clearing, this message can be sent as soon as the full amount is calculated.

Where a device-capture system is used, the POS terminal combines the authorization response with the information from the authorization request to create the clearing message. Where a processor host-capture system is used, the host keeps a copy of the authorization coming from the POS device, prior to sending the request for authorization, and uses this information along with the authorization response to create the clearing message. A device connected to a host-capture system can keep a shadow (copy) of the clearing batch for information purposes.

For devices using host capture, all transactions appear to be single message, as the processor is responsible for generating the clearing message. Although single message systems typically use full financial messages, they can also use an authorization followed by a clearing message.

The Takeaway

Typically, your processor will select the processing type for you and it is best to listen to their advice. Still, it is also advisable that you understand why your transactions are processed the way they are, so that you can set up your sales processing system correctly.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).

Last week I had a conversation about debit card processing with one of our merchants. She wanted to know how PIN-based debit transactions are different from signature-based ones. More to the point, she wanted to know whether or not she would save money if she switched to PIN-based debit processing.

After we wrapped up our conversation I went through our blog’s archive and discovered, much to my astonishment, that we have never actually posted anything about debit card processing. Yes, we have posted a boat load of articles about the huge debit card interchange fight that the retailers somehow managed to win, but we have never reviewed the mechanics of debit transactions.

Well, this article will be my first attempt to make amends for our negligence and in the process I will answer my client’s question for you.

Debit Card Processing Basics

First, though, let me give you a short outline of the debit transaction cycle. PIN-based point-of-sale (POS) or ATM transactions are usually authorized and cleared (posted) at the same time. Settlement then occurs at certain pre-defined times during the day. Here is the debit transaction authorization, clearing and settlement cycle for Visa and MasterCard transactions:

1. The customer offers a card for payment.
2. The card is swiped (either by the merchant or customer) through a POS magnetic-stripe reader, is placed into a chip-reading POS device, or is waved in front of a wireless reader. The merchant enters the sale’s amount. The cardholder keys in the PIN (if applicable). A transaction authorization request is routed to the acquiring bank.
3. The acquirer determines the Association (Visa or MasterCard) to which the authorization request should be sent.
4. The Association routes the request on to the card issuer and facilitates settlement.
5. The issuer responds to the authorization request and, if approved, the transaction is posted to the cardholder’s account.
6. The Association routes the authorization response to the acquirer.
7. The acquirer forwards the response to its merchant.
8. The merchant completes the transaction accordingly.

Keep in mind that, if a chip reading POS device is available, the merchant should always give preference to chip card processing, rather than swiping the card.

PIN-based vs. PIN-less Debit Card Acceptance

Now to my client’s question – whether PIN-based debit processing is cheaper than signature-based one. The answer is no, it is not, provided we are comparing the same pricing models for each type.

If you look at Visa’s and MasterCard’s interchange tables, you will see that neither Association sets separate debit rates for PIN-based and PIN-less transactions. There are only rates for debit cards, which is why some supermarkets require PINs, while others do not. Think about it for a second, if a merchant that processes huge volumes of debit transactions uses signature-based cardholder verification, how likely is it that this type of payment acceptance would be costlier than another one that is available to them? After all, it is highly unlikely that the merchant would be ignorant of a cost difference, if there was one.

Actually, the Associations will no longer have any say in the setting of debit interchange rates. The Federal Reserve has ruled, and Congress has approved, that card issuers can charge no more than 12 cents per debit transaction. Again, no difference is made between PIN-based and PIN-less payments.

The difference between the two forms of debit processing is in the cardholder authentication method. It is generally accepted (and there are studies that support this proposition) that PIN-based debit processing is more secure than signature-based one, although the former has its own unique weaknesses.

The Takeaway

So when deciding on how to process debit transactions, pricing should not be a consideration. That said, you should be using interchange-plus and we have previously gone over the reasons in detail.

What you should be looking at is fraud prevention. As I already mentioned, PIN-based payment acceptance is considered more secure than signature-based, so you should probably go with it. That said, if you choose to go PIN-less and do it right, fraud should not be a concern.

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In the credit card processing world car rental companies are considered high risk merchants. The reasons are the usual ones: high rates of customer complaints, disputes and chargebacks. More often than not, the causes for customer discontent can be traced to improper payment processing procedures and poor customer service. Both of these can and should be remedied and in this article I will show you how to handle the credit card acceptance part.

Car Rental Credit Card Processing Procedures

Following are the most important aspects of the car rental credit card processing cycle:

1. Obtaining an authorization approval. You need to do that for all transactions, because the car rental floor limit is zero. U.S. merchants should use the $0 Account Number Verification Service if they want to verify that an account is in good standing, instead of a $1 authorization status check.

   
   Each authorization approval is valid for the estimated duration of the car rental period. If the rental period is extended, you will need to obtain an incremental authorization for the expected additional transaction amount.

2. Obtaining an incremental authorization approval. Follow standard authorization procedures to obtain an approval for the incremental amount. If you receive a decline, request that your customer use an alternative form of payment.

   
   If the car rental period extends for longer than two weeks, you need to settle the original transaction and obtain an authorization approval for whatever the estimated balance is.

3. Final authorization and 15% rule. When your customer returns the vehicle, the following authorization procedures should be implemented:
   1. If you had not previously obtained an authorization approval (which you should have done), authorize the total transaction amount.
   2. If an authorization approval was initially obtained, apply the “15% rule” to estimate whether or not an incremental authorization is needed. Here is how to do this:
      1. Add 15% to the original authorization amount.
      2. If the final transaction amount is greater than the sum you received above, an incremental authorization is needed for the difference between the initial authorization amount and the actual transaction amount.
4. Processing an authorization reversal. If the final transaction amount is lower than the initially authorized one, you need to process an authorization reversal for the difference.
5. Billing for additional charges. After a car is returned, you may discover that there are additional charges (for example, gas or mileage, traffic or parking violations, etc.) or calculation errors. You can bill your customer for these charges if your car rental agreement states that you can do it and your customer has agreed to it. Additional charges must be processed within 90 days of the vehicle’s return. Here is how to do it:
   1. Create a separate or amended car rental sales agreement for the additional charges, obtain an authorization for it and deposit it.
   2. Write “Signature on File” on the cardholder signature line, if using a separate agreement.
   3. Mail a copy of the agreement to your customer with a detailed explanation of the additional charges within 90 calendar days of the transaction date.

   
   The additional charges are the ones that are most likely to lead to a customer dispute, even if completely legitimate. You need to document them carefully and be ready to provide all requested documentation to your processor per request. For example, if a customer disputes a charge related to a parking ticket, you will need to produce the following information:

   • A copy of the car rental agreement.
   • Documentation from the authorities that issued the ticket.
   • The rental vehicle tag number.
   • The place, date and time of the violation.
   • The law that was violated.
   • The amount of the fine.

The Takeaway

The payment card industry is not going to change the high risk classification of car rental companies any time soon. However, if you implement the above guidelines in your credit card processing procedures, you will help maintain the good standing of your own company’s merchant account. You will still be getting customer disputes and will have to deal with the occasional chargeback, but it’s a numbers game. Your goal should be not to eliminate these, but to keep them to a minimum that both you and your processor can live with.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).