How Merchants Get Paid

Have you ever wondered how money flows to a company when you use your bank or travel/entertainment credit card to purchase a product or service?

First, the company that sells you the product or service has to have a merchant card services account. This account enables the company to accept credit cards.

This is how a basic, retail credit card transaction works: After you or the cashier swipes your credit card through a reader, software at the point-of-sale (POS) terminal dials a telephone number (using a modem or Internet connection) to call an acquirer or processing company.

The acquirer is an organization that collects credit-authentication requests from merchants and provides the merchants with a payment guarantee.

When the acquirer gets the credit card authentication request, it checks the transaction for validity and the record on the magnetic strip for:

• merchant ID,
• valid card number,
• expiration date,
• credit-card limit, and
• card usage.

Once these items have confirmed, the processing company approves the charge. It is then responsible for making sure the proper bank accounts are debited and credited. And it takes responsibility for resolving errors or fraudulent charges.

The processing company doesn’t do this for free. It makes money on every single credit card transaction. In most cases, the processing company gets both a per-transaction fee and a percentage of each sale (also known as the discount rate).

So, to fill in some numbers, when you spent $100 at the flower shop, the processor may have received $0.25 as a transaction fee, plus a small portion of the sale in this example, $0.022.

Of the $100 you paid, the credit card processor got $0.272.

After the transaction has been processed and the money has been allocated to the processor, the $99.728 due to the florist is deposited into the company's bank account.

After the transaction has been processed and the money has been allocated to the processor, the $99.728 due to the florist is deposited into the company’s bank account. Some processors also enjoy a “float” period—often one, two or three days-during which they hang onto the merchant’s money before depositing it into the bank account.

Some merchants get more favorable terms than others when it comes to accepting credit cards, but the above numbers are fairly common.

For small purchases, of course, the per-transaction fee can dramatically reduce a merchant’s income. That explains why many businesses have a minimum credit card charge amount.

And for large purchases, the discount rate can take a pretty good bite out of the merchant’s revenue.

The reduced income from accepting credit cards does explain why some companies will encourage you to pay them in cash or with a check.

Plus, whenever you use a credit card, there is a risk that you will “chargeback” the amount of your purchase—i.e., dispute it with the credit card issuer. The issuer then will go back to the merchant to get a refund, along with a penalty fee (often in the neighborhood of $25).

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