If you have ever been out to eat, which I am sure you have, you will know that the food is not free. Sadly, after you indulge yourself on that delicious meal and desire to drive yourself home for a comfy nap, there is something important that has to take place. You have to pay for your food!
More importantly, the restaurant that you just dined with has to have some way in order to receive payments for the services they provided you with. While they could accept manual labor, traded goods, or even the occasional IOU, I am willing to bet they want a form of monetary compensation.
Being the case, they will want you to provide this compensation through cash or card. If you are a business owner than you know which one you would prefer. The cash is king every time. Why though do business owners prefer cash over credit cards? Well, that is exactly what we are going to be diving into in this mini series.
More so, we are going to look behind the scenes of payment processors. What really happens when a customer swipes their credit card? Why do businesses constantly loses a ton of their profits to these simple transactions? It would seem that this day and age, we would have a simple solution for this everyday problem. Surprisingly, there is a lot more to it than meets the eye.
Starting with the payment processing basics, we are going to break apart these wonders into the three main parts. Lets go over these three parts below that will be covered in this post:
- POS or the point of sale system
- Payment Gateways
- Merchant Accounts
These are all extremely important pieces to know and understand if you are going to be running a business that aims to accept electronic payments. Although, at the end I will share a secret with you that will simplify all of this for you!
Kicking off this journey into the electronic payment world, lets start at the top of our list with the POS system.
POS – Point of Sale Systems
Starting off the payment processing system basics, we are going to take a look at POS systems, also know as Point of Sale Systems for those unfamiliar with this term.
If you are going to be accepting payments at any level or for any business you will definitely need a POS system. Now, these systems can be very simplistic like a hand held card reader, or they can be very complicated like a retail cash register or they could even be a landing page on a website. Typically for a POS system to function it is going to need an internet connection. If your POS system is a larger scale model, it will probably need a hardwired connection and not simply just a Bluetooth or wireless connection.
The entire purpose of the POS system is to allow the business owner an interface to accept different forms of payments. For instance, the card reader can take credit and debit cards and process the payments on the back end which we will discuss shortly. Without a form of card reader, it is quite impossible to accept credit cards for your business at scale.
Now, for larger businesses you may have to completely download software for your POS which can get quite complicated even to the point of needing to hire IT professionals to help you maintain it. We suggest keeping the POS solution for your business simple and effective. The more features and integration you try to achieve, the more problems that can arise resulting in frustration and costly maintenance fees.
The next piece to the payment processing system is something called a payment gateway. Another way to think about this would be – the backend solution to your POS system that does all the work.
To understand what this is, we need to think about what happens when a customer chooses to pay for their dinner with a credit card. What is actually happening during that transaction is vital information like the credit card number, CVC, person’s name, account information, and data is being transfer in milliseconds all over the world to servers in order to confirm a few things:
- Is the account authenticated and are the proper inputs there to confirm that
- Does the account balance have enough funds
- Acceptance or denial of the transaction
There are more interim steps, but we only need to focus on these three steps to understand payment gateways. The most important thing throughout this entire process is that the data and information being sent around the world has to not only be accurate, but safe, secure, and encrypted. That is basically the job of the payment gateway.
The payment gateway secures and connects the servers to one another. This allows the transaction to take place and the data to flow to all the necessary locations without it going to the wrong places or hackers accessing it.
After you understand what is happening with the payment gateway, you now know the processes taking place when someone simply swipes a card to pay for a meal. Although, in order to have a payment gateway most banks will require you to hold what is called a Merchant Account.
If you are unfamiliar with this term, then do not worry we’ve got you covered. A Merchant Account is a business specific bank account that allows the business to accept and process electronic transactions. Fairly simple really, it is basically your bank account that will tie all of your payments together.
While this is simple in concept, only certain banks will allow a business to hold a merchant account. Therefore, it is important to make sure your bank will allow you to do this. Unfortunately, with the added bonus of accepting electronic payments the account could incur higher fees. In addition, there could be per transaction fees that add up fast. The compensation for the fess are the additional features that comes with your business account.
It is also important to note that not all Merchant Accounts will come with a payment gateway either. Some will allow you to use their plug-in or software in order to accept payments and utilize their gateway. Others will simply just act like a traditional bank account with an extremely high frequency of transactions allowed.
Payment Processing Basics
Now that you know the Payment Processing Basics about the different parts of electronic payments, credit cards, and debit cards, there are a few things to think about.
First, you can create your own payment processing system by piecemealing different companies together or solutions for each of the required parts. You could use a traditional Ipad for a POS system. This would allow you to run payments through a plug-in or downloadable software that needs to be obtained from a gateway provider. Then use a bank you are familiar with as your merchant account to connect the gateway to on the backend.
This is all possible, but highly complicated and problematic. Not to mention you will be hit with fees every step of the way from each part of the solution which can add up quickly. In addition, you could potentially be working with three different institutions to just accomplish this task and necessary integration.
That is why a lot of companies these days just decide to go with an all in one solution. These are companies like Square or Stripe that basically take care of everything for you and give you a flat fee per transaction. Now, you might end up paying a little bit more, but trust me it is actually worth it rather than dealing with the headache that is payment processors.
Long story short, if you are new to payment processors then make life easy for yourself. Use an all in one solution until you have done enough research and talked to enough people to make a more educated decision. Take your time and be smart with this because at the end of the day, it is your businesses profit that will be effected.