Lesson 4: Processing Methods

Now that you have a handle on what makes up a transaction and all of the pieces in between, let’s take some time reviewing the various methods of accepting credit cards, from traditional credit card terminals to accepting payments on your mobile device.

Credit Card Technology

In today’s world the technology has advanced considerably thus increasing the efficiency of credit card processing as a whole.  As the card brands pushed their products down the consumer’s throats (offering a “billion free reward points” for signing up today) somehow. The actual card technology took a backseat having only a single upgrade in 1970 with the introduction of the magnetic stripe.  That’s right, in America the magnetic stripe that is on 99% of our credit cards in use today is based on technology from 1970, which was invented in 1951 during World War II as a method for recording audio!

As you can imagine, being virtually the only technology that is that old and still heavily used today there are millions of technologies available that are more secure, more reliable and much more efficient than the magnetic stripe.  As it turns out America, the land of entrepreneurs and home the inventors is one of the last countries on Earth that still use the magnetic stripe on its credit cards.

Thanks to the recent headlines of the hacks at TJ Maxx, Neiman Marcus and Target this all about to change.  Legislature has passed (FINALLY!) mandating a serious overhaul to the credit card processing technology.  The new method is called EMV (Europay MasterCard Visa), which essentially introduces “smart” technology into the credit card and utilizes an authentication method called “chip and pin”.  Whereas the credit card has an integrated circuit board and the cardholder knows the PIN.  This will add several layers of security to the transaction process. This new mandate is slated to be effective October 2015.

Overhauling the entire credit card processing acceptance process is going to be a substantial undertaking. Starting with the re-issuing of millions of credit cards all the way down to the upgrading of all of the traditional magnetic stripe readers to be EMV capable. We encourage all merchants to embrace these changes as they are necessary to ensure safe, reliable and secure transactions in the future.

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Understanding EMV

The purpose and goal of the EMV standard is to specify interoperability between EMV-compliant IC cards and EMV-compliant credit card payment terminals throughout the world. There are two major benefits to moving to smart-card-based credit card payment systems: improved security (with associated fraud reduction), and the possibility for finer control of “offline” credit-card transaction approvals. One of the original goals of EMV was to allow for multiple applications to be held on a card: for a credit and debit card application or an e-purse.EMV-Card-1

EMV chip card transactions improve security against fraud compared to magnetic stripe card transactions that rely on the holder’s signature and visual inspection of the card to check for features such as hologram. The use of a PIN and cryptographic algorithms such as DES, Triple-DES, RSA and SHA provide authentication of the card to the processing terminal and the card issuer’s host system. The processing time is comparable to online transactions, in which communications delay accounts for the majority of the time, while cryptographic operations take comparatively little time. The supposed increased protection from fraud has allowed banks and credit card issuers to push through a ‘liability shift’ such that merchants are now liable (as from 1 January 2005 in the EU region) for any fraud that results from transactions on systems that are not EMV capable.

Although not the only possible method, the majority of implementations of EMV cards and terminals confirm the identity of the cardholder by requiring the entry of a PIN (Personal Identification Number) rather than signing a paper receipt. Whether or not PIN authentication takes place depends upon the capabilities of the terminal and programming of the card.

Card Acceptance Technologies

Simply deciding that you want to accept credit cards isn’t the only decision you have to make but how as well.  Long before the Internet and the “connected world” a merchant would have to manually get an imprint of the credit card using a “knuckle buster” to accept a credit card.  A cumbersome process indeed.  With the boom of the information age there are now several different ways to accept cards; from your mobile device in the field to sitting in your pajamas at home; the options are endless.knucklebuster

Typically, how you are going to accept credit cards is the last thing on your mind when you are starting your business. You know that you will need to accept them but have given very little thought as to how.  Most of you will settle with a traditional credit card terminal while others will find themselves forced into using XYZ Processing because they are the only one that works with the POS solution that you have selected for your business.

Credit Card Terminals

The most popular method of accepting credit cards today is through a standard credit card terminal.  The terminal sits on the checkout counter and the card is swiped and the card number is transmitted (via phone line or internet) to the processor for approval.  Once approved it churns out the receipt for a signature.

This is a standalone process and runs completely separate from any other business functions.  You will have to manually enter the transactions into your accounting system for record keeping and have very limited ability to customize the transaction process.

Point of Sale (POS) Software

Taking the pay at the counter concept a step further, POS software solutions offer a more integrated solution of accepting credit cards in your business.  The software itself is often customized for your business and provides a much more efficient method of accepting cards.

POS software can handle inventory, customer lists, returns, voids, sales, loyalty programs etc…  There are two different delivery models for this software.  The first is the traditional distributed model in which you purchase the software and own a specific version of that software outright.  The second is delivered as a service and you pay a monthly fee to have access to the latest version of the software, otherwise known as cloud based or Software as a Service (SaaS).

The main difference between the two models is how you prefer to pay for the solution.  Distributed software requires a large upfront payment but the tradeoff is that you own that specific version of the software.  With a cloud based solution you pay a much smaller monthly fee but you never actually have it paid off, it’s a rental!  Cloud based solutions are a growing trend and typically will provide much more value for the money, since you are always using the latest and greatest features available.

There are several items to consider when purchasing a POS solution.  For the purpose of this article, we will not go into the minutia of choosing the best solution.  If you are in the market for a new POS solution or looking to upgrade an existing system, we recommend checking out POS Superstore (www.possuperstore.com) they have an abundance of resources that will prove to be of great value in your search.

Ecommerce Processing

Many retailers are taking their products online and opening up a much broader audience.  Even more merchants have skipped the entire physical storefront and gone straight to the casting of a much broader net by setting up an ecommerce store and offering their products to the world.  When it comes to accepting credit cards on a web site you have many options.

The quickest and easiest method is to sign up with an aggregator such as PayPal or Amazon Payments.  You will learn the pros and cons of aggregation in a Chapter 5.  If you decide that aggregation is not the best fit for your business, you are going to need a payment gateway account as well as a merchant account to accept payments on your website.

A payment gateway is a transport software which securely transmits the credit card information from the customer’s home computer to the underwriting bank with whom you have your merchant account through.  Generally, adding a payment gateway to the account adds additional fees to the transaction stream as well.  So be sure to discuss this with your merchant account provider.

There are several payment gateways available, but the first place to start is to look at which ones are compatible with the shopping cart software that that you have chosen.  Most, but not all, gateways allow you to choose from a handful of merchant account providers.

Payment gateways open the doors to several great business tools that will increase your conversion rate and ultimately improve efficiency throughout your business.  Such tools as recurring billing, transparent redirect, secure customer data storage, payment forms, email receipts and invoices etc…  Real-time reporting gives you an up to the minute status on the health of your business and also makes it easy to load the transactions into your accounting system.

You can learn more about payment gateways and processing online in Chapter 7 where we tackle PCI compliance and data security concerns.

Mobile Processing

You’ve probably seen the little “square” shaped card reader that attaches to the headphone jack of your mobile device and allows you accept credit cards.  As our phones get smarter and the world more connected, conducting transactions over the airwaves on our phones is going to become commonplace.the-pros-and-cons-mobile-payment-square

Having the ability to accept credit card payments through your mobile device has become an essential business tool to many merchants and for good reason.  Service professionals can now guarantee payment at the time of the services being rendered, flea market vendors no longer need to run an internet cable from booth to booth… for the right merchants the upsides are huge!  However, there are a few things to consider when comparing the various mobile solutions.

The first consideration is being the way in which the card reader connects to the mobile device.  The most popular connection method is through the headphone jack.  Since virtually all mobile devices have a headphone jack this option paved the road of least resistance for the mobile payments companies to enter the market and avoid serious compatibility issues.  Eerily similar to the archaic technology of the magnetic stripe, the headphone jack is based on very old analog technology.  This presents very large limitations in how securely the software company can handle the card data.  There are a few solutions that utilize the much more sophisticated ports on mobile devices.  These solutions would provide a much more secure processing environment.

Aside from securing the transaction you will want to look into compatibility with your existing business software, be cautious of account aggregators and understand ALL of the fees associated with each transaction.  If you are running a real business and it is your lifeblood, we suggest using a traditional merchant account provider that offers a mobile payment solution which utilizes the native ports on your mobile device.