Debit cards and credit cards are enabling a cashless society to emerge in the 21st century. The modern credit card machine does a lot more than make a carbon copy of a simple credit card transaction.
Wi-Fi and emerging cloud-based technologies are accelerating change during this age of rapid global communications. That rapid change enables cashless transactions and creates greater economic opportunities. It all starts with the card associations.
What Are Card Associations?
A card association is an international business organization that enables credit card reader transactions and other credit-card-associated services. Four major card associations dominate much of the North American market. Those are:
The card associations all operate through subsidiary companies that usually reflect their respective business affiliations.
How Do Credit Card Processing Companies Work?
A bank or other financial institution creates and underwrites the actual card that consumers use to conduct credit transactions. Credit card processing companies charge an interchange fee to enable the transactions. The merchants pay the fees. The transaction fee is why many gas stations charge customers a few cents more for credit card transactions than when paying with cash.
What Is a Merchant Account Provider?
Credit card transactions need an underlying amount of cash to make them work. Without cash, it just becomes a shell game. Something has to create your credit card and provide administrative services so that a credit card machine will work. That something is the merchant account provider, which creates a deposit account for merchants. When a customer uses a credit card, the merchant account provider deposits the money after subtracting transaction fees.
How Do Payments Get Processed?
A payment processor provides the technology needed to make the credit card reader work. That means far more than just providing the technology. The processor maintains the flow of cash to merchant accounts as it approves and categorizes various transactions.
What Are the Costs?
There are virtually no free credit card processing transactions. Each transaction triggers fees from the respective card association. Without the fees, it would be impossible to provide the infrastructure and technological development needed to support individual credit card purchases. The transactions often fall within a three-tier range of fees based on the types of purchase made, level of risk, and if cardholders have rewards points or other earned discounts.
What Kinds of Fees Are Paid?
Since there are no free credit card processing transactions, what exactly do the fees look like? Among fees charged are the card association fee and the interchange fee. Those fees collectively make up the wholesale fee charged to enable card transactions. The merchant pays the wholesale and interchange fees and not the cardholder.
Sometimes, merchants will pass on the fee to customers. That usually happens with merchants who operate on a very thin profit margin. Gas stations are the best example. The profit on a gallon of gasoline is very small for the people who own the pumps. Many pass on the fees with a higher per-gallon charge when using a credit card.
Even with the fees, modern credit card machines are growing in popularity. They offer customers and merchants an easy way to exchange money and services. As these machines continue to be used, cash can be used less and less for transactions.