Credit Card Processing Basics

Credit card processing is the lifeblood of e-commerce. This is


especially true when it comes to adult sites. Recurring billing is the profit

model for both percentage based partnership programs as well as pay per join programs.

It holds true that the marketing department is responsible for bringing the surfer to your site and convincing him to signup, but insuring that you get paid lies strictly in the hands of credit card processors.


So how does credit card processing actually work?
On the surface membership approval seems basic enough, but behind the scenes it is a technically complex process. You can see this when you consider that membership must be approved or declined within seconds otherwise the surfer/customer will be left waiting anxiously and wondering what on earth is happening. Fortunately, we only need a basic understanding of the process in order to take advantage of what the credit card processor has to offer.

Once the surfer is ready to buy, he enters his

personal information into a form on the sites join page. This information is then submitted to the processor who determines the validity of the information, and whether or not the surfer has enough available credit required to make the purchase. If everything checks out, the surfer is then given his username and password. He is now a member of the site and has access to the sites content and any other membership privileges.


What is a merchant account and how does it work?
A merchant account is simply an agreement between a bank and a merchant that allows the bank to handle the card processing services in exchange for fees. There is usually a one-time upfront fee as well as monthly and/or per-transaction fees.

Normally a company needs good credit to obtain a merchant account. In the case of a newer company that may not have yet established credit, it is likely that the owners personal credit will be used.

A merchant account has certain restrictions though, for example, a fixed limit on the amount of money that can be processed each month. When this limit has been reached for a particular month, any additional transactions during that month will be denied by the merchant account provider.

It is important to keep a good relationship with your merchant bank in order to be able to get this limit raised when needed.

In addition to normal fees, credit requirements, and processing limitations, the bank may require the merchant to deposit a certain amount of money in advance. This amount is usually determined by an estimate of how much in sales the account will do. If the merchant doesnt have the money required, the bank may arrange to keep 100% of the initial transactions until the minimum deposit amount is reached. The deposit is held in case money is needed to offset charge-backs or possible fraud. The bank may also reserve additional cash from every transaction and hold it for 180 days, thus the term "rolling reserve."

Whats the deal with third party processors?
Recently, third party processors have become increasingly popular. Generally, with third party processors there are no start-up or monthly fees. These third party processors charge a fixed amount per sale. The percentage charged is usually much higher than that of a merchant account, but a third party is still a good idea for those who are unable or unwilling to bear the costs and responsibilities of their own merchant account. A third party processor can be thought of as a "middle man" between merchant and bank.

What else can you tell me?
Many credit card processing services offer additional benefits like reseller program software, detailed stats, ad tracking and a host of other tools.

Fraud prevention is one of the more costly and intensive services that the bank or third party processor always provides. The term "scrubbing" is used to describe the method the processor uses to determine whether or not the person attempting to make the transaction is the actual cardholder. Some processors have their own scrubbing systems, while others rely on external databases. Scrubbing is absolutely vital to the credit card approval process in order to keep charge-backs and fraud to a minimum.

Generally speaking, charge-backs are not a problem for the merchant. There is always going to be the occasional dissatisfied customer. When a cardholder claims to have not made the purchase, it becomes whats known as a customer disputed charge (or CDC). In this case the merchant has a fixed amount of time to show proof of the transaction, which sometimes can be difficult when business is being done over the Internet. In any case, it is not a major problem unless the merchant has an unusually high number of CDCs in which case he may be required to pay a charge-back fine.

Well, thats all for now. Hopefully now you have a better understanding for how credit card processing works and how it relates to business over the Internet.


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