Processors and Gateways: The Magic Behind Credit Cards Explained

Restaurant Technology

Consider the phrase, “for every action there is a reaction.” The world of commerce functions along the same principal. For every credit card transaction, there are a number of processes that occur in response.

There are four key players involved:

  1. The merchant
  2. The customer
  3. The acquiring bank that provides the merchant’s processing services
  4. The issuing bank that issued the customer’s credit card or debit card

In order to understand the difference between credit card processing and payment gateways, it’s vital to first understand what makes each an important component throughout the transaction, from start to finish.

The bankcard networks that ferry billions of transactions between merchants, processors, and banks are modern marvels. Whenever a customer pays for a purchase using a credit card, the first step is authorization. Are their funds available to make a purchase? To verify this, transaction information is passed from the restaurant terminal or software to a processor, and then through the card network to the bank that issued the credit card for approval. The issuing bank then sends an authorization back through the card network to the payment processor before it finally ends up back at the restaurant terminal, all in a matter of seconds.

Payment Processors

Simply put, payment processors take the money from the cardholder’s bank account and deliver it to your, the merchant’s, bank account. To accept credit cards at your restaurant, you will need to set up an account with a merchant service provider. When a customer submits their card for payment, a complex routing of data, as described above, begins. A payment processor typically provides credit card machines or other equipment used to accept credit card payment. The processor connects the cardholder’s bank with the merchant’s bank and makes sure that all of the money ends up in the proper place.

For the typical restaurant business dealing with customers on a daily basis, it’s essential that you get the technicalities of processing your payments right. While there are various options to receive payment at your restaurants, POS seem to be among the top favorite options.

Why Restaurants Prefer Pos

Point of sale, or POS, will always be an important part of any business, especially when it comes to businesses in the hospitality industry. POS technology makes hospitality management systems previously considered complicated pretty easy. Begs the question why anyone would even think of going for a manually option in taking payments for food and services delivered. 

Most restaurant usually need three different POS systems at least for the front-office, back-office and kitchen administration to run efficiently. An example of such POS system in action is Lavu’s iPad point of sale system. In addition to processing payment, this system comes equipped with software for fast customer service and order management of a restaurant. This software helps in keeping track of the number of customers, the size of their orders, table numbers, and cash transactions.

With all that benefit and features integrated into a piece of tech that fits into your palm, it’s understandable that more restaurants these days are opting for a more digital method of making payments. While it’s interesting to note all the benefits of running a cashless business, it’s also important to understand the process that ties all these functions together – payment processors.

Since it’s somewhat impossible for restaurants these days to run without the need for a cashless form of receiving payment, understanding how to pick the best payment processing platform for your restaurant is vital.

When choosing a payment processor, many restaurants automatically pick the lowest bidder. They assume that they’re saving a ton of cash and that the profits will just roll in like high tide. It could happen, but it is highly unlikely. Choosing the lowest bidder may be a mistake – the first in a series of mistakes that can cost your restaurant both time and money.

Here are a few things to consider:

“Buried” Fees

They aren’t necessarily hidden, just not boldly stated. Companies typically advertise their lowest “qualified” rate. These generally apply to certain types of cards and most likely only if they’re physically swiped through a card terminal. Online transactions are a different animal entirely. They’re generally “non-qualified” rates.

The catch? Your eye. It catches the advertised “qualified” rate. You sign without asking all the right questions. Companies are not obligated to go out of their way to highlight these “non-qualified” rates, nor are they obligated to highlight in glaringly bold text that there are special fees related to cancellations, withdrawals, or batch processing. It’s up to you as the consumer to know to ask and to read all related documents thoroughly before you sign-up.

Slow Access

Back in the day, if there was suspected suspicious activity online requiring investigation, you may not have been able to touch your money for up to several weeks for a flowing business like a restaurant, the resultant effects of a slow access payment process can be catastrophic. The problem isn’t necessarily for you, these days, payment processors need a very good reason to freeze your cash.

To prevent this, ensure your payment processing provider has a functional anti-fraud investigation policy that checks to make sure you don’t get locked out of your account. Always look for a provider that gives you fast secure access to your money.

Data Security

Fraud and data breaches are not just striking the huge online merchants. It’s a real concern for anyone doing business online. Installing and monitoring your own fraud protection system may sound like the way to go, but it is extremely expensive and time-consuming. Your payment processor should bear that burden. Choose the most secure and reliable payment processor you can find. When evaluating potential payment processors, be certain to review their fraud-protection services. A couple “must ask” questions those services should answer are:

  •       Do they flag or deny potentially risky transactions?
  •       Is data securely stored and encrypted?
  •       Be sure to choose a secure provider. The alternative could cost you.

Insufficient Protection

Yes, we’re still talking fraud here. Most consumers are law-abiding citizens who play by the rules. There are a few sketchy characters out there however, who will try to pay you with money from a hacked credit card account. Some may repeatedly complain that they never received their product or service when they did. A processor that will work with you in alleviating the fraudulent activity burden is a must at this point.

Setup & Support

Nothing scares most restaurant owners more than setting up a payment processing system. Some are more complex than others. Look for one that simplifies the setup process and requires little to no technical expertise. Also, make sure they have support from real live people should you encounter any problems with setup, processing, or individual sales transactions.

PCI Compliance

The PCI Data Security Standard is a U.S. industry standard governing how customers credit card data is secured. There are rules touching on how you process and store cardholder data.

Instead of recreating the wheel, spending time and money to build a system in compliance with the ever-increasing rules laid out by the PCI Standard, partner with a payment processor that is already in compliance. It will help reduce your workload and give you peace of mind.

All payment processors offer their own unique features. Companies should compare each offer including its fees and look for payment processing that:

  •       is simple to setup
  •       is PCI Compliant
  •       secures and encrypts customer data
  •       allows quick access to funds
  •       has complete fee transparency
  •       has a U.S. based support staff to answer any transaction or technical questions

To accept the payments, a second factor that provides authorization comes into play: the gateway.

Payment Gateways

Payment gateways are third-party servers through which authorization is, or isn’t reached. Following the transmitting of data from the payment process, the payment gateway is the server to which you connect your website or cash register to process credit card transactions.

This server helps authorizing banks to approve or decline pending customer transactions and transfers any and all information related to the sale. A payment processor is the technology that processes the data received from the payment gateway and interacts with the card network and the issuer bank (i.e., the payer’s bank) to verify that the merchant has adequate funds to complete the transaction.

The gateway provides a secure path from a website or terminal to the payment processor’s authorization and transaction system. The gateway then notifies your website, POS terminal or cash register whether a charge is approved by the cardholder’s bank, and then submits the charges for settlement, so money can be drawn from the cardholder’s bank. However, it is important to note that payment processors may function as their own gateways, but a gateway account is not sufficient without an integrated processor.

Always remember, security is an integral component of all payment gateways and systems, as the credit card numbers between merchant and banks need to be protected from any fraudulent parties at all times.

Difference Between Merchant Accounts And Payment Gateways

Merchant account is a retailer’s bank account that allows payments from consumers’ credit or debit cards. Payment gateway on the other hand, is not a bank account but it only acts as a terminal for verification and authorization of transactions in credit card processing.

Merchant account and payment gateways are sometimes conjectured as one for the fact that both deals with financial transactions. But actually they are both very different from each other though they are partners in the matters of online business and financial transactions.

What A Merchant Account Is

It is a type of bank account that allows credit or debit card payments for goods or any services offered in any business. It practically manages all the financial transactions in your business.

Many choose to have a merchant account because it has great benefits to both the restaurant and the consumers. To the customers, it saves time and the problem of paying cash-only payments. It’s also possible to make more bulky food purchases without needing to carry large amounts of money on their person. For the average restaurant business, it saves you from constantly sorting all the cash and checks in your business, as everything would be done electronically.

Getting a merchant account isn’t easy and it is not for free, meaning account providers charge fees to every transactions and services made in the merchant account. That is why there are terms, conditions and policies that restaurant owners should fully understand and certain factors that must be considered before a merchant account could be approved by any account providers.

These factors are very crucial too to account providers because these factors will give them the assurance that your business would be strong enough against economic instabilities or financial crisis as account providers too are affected when that happens.

This means that you are partners in running your business. The good news is that whether you are starting a brand-new restaurant or even if you’re a seasoned restaurant owner, a merchant account provider can complete a full-scale analysis of your business and then provide a total solution for your specific business needs.

Merchant Account Solutions Include:

  •       Retail (POS point of sale)
  •       Moto (pay-at-the-pump)
  •       Wireless
  •       eCommerce
  •       Online Retailers
  •       Check Processing
  •       ACH (Automated Clearing House)
  •       Phone & Mail Order
  •       Restaurant
  •       Hotel/Lodging
  •       High Volume Processing

At this point, you’re probably wondering how to go about owning your own merchant account, its easy with the right help. To begin, we advise that you take a quick look at this.

What A Payment Gateway Is

A payment gateway is not a banking account instead it’s a digital platform that serves as an authorization and verification agent on behalf of a business, in this case, restaurants. It is the middle man between meal payment at a restaurant, the consumers credit or debit card, and your merchant account. It acts as a terminal for credit or debit card validation and transaction details encryptions.

Payment gateways are very helpful both for online and offline businesses. Although they work well within online businesses that are connected with a merchant account, their implementation is seen in almost every day to day transaction happening in the average brick-mortar store.

Here’s how payment gateway works in online sales processing to let you understand how it is different from a merchant account:

  1. Buyer visits a business site and selects items that he wants to buy.
  2. The buyer then receives a copy reviewing all of the items he selected and he then clicks on the “buy me” button when he’s sure with his purchases.
  3. All items selected will then be put in the electronic shopping cart meaning that it is being ordered.
  4. The consumers are then asked to put some details about their credit or debit card accounts before completing the buying process.
  5. When confirmed, the site will then pass the transaction details to the payment gateway. The payment gateway will send transaction information to the bank in which the customer’s card was issued.
  6. The issuing bank will then give a response to the payment gateway whether it was approved or not. If approved the buyer’s credit card will be debited and the retailer’s account will be credited.
  7. The payment gateway will forward the response to the retailer’s merchant account server.
  8. The merchant account server will relay the response to the customer to let him know if the order was successful or not.
  9. This process will only take a few seconds and at the end of the settlement period, the customer’s issuing bank will deposit the total amount of money in the transaction details to the retailer’s account. Payment gateways usually log all the delicate information in business transactions to ensure that it is securely transferred from consumers to retailers.

How Payment Gateways Fits Into The Average Restaurants Business

Well, if you’ve been following this article closely, you’d have come to the realization by now that cashless payment processing is the focal point here, and to achieve this, the internet comes into play. Meaning your payments move from being offline to becoming online and when that happens, understand the correlation a payment gateway has between your customer’s credit/debit card payment and your merchant account becomes vital.

Choosing A Merchant Services Provider Checklist

  1. Never choose a Merchant Account Provider with an Early Termination Fee. This fee is used to “lock-in” a merchant. If you agree to an early termination fee you must pay the processor to close your account even if they provide horrible payment processing, low-quality customer service, and inadequate technical support.
  2. Never choose a Merchant Account Provider with an Application Fee and Setup Fee. This is a junk fee that is simply a revenue stream for the provider.
  3. Never choose a Merchant Account Provider with an Installation fee or Programming Fee. This is another junk fee.
  4. Beware of Annual Fees and Monthly Minimum Fees.
  5. Ensure your payment solution is PCI Compliant. Your merchant account provider should be able to provide you with written verification that their solution is on the MasterCard and Visa official PCI Compliance List.
  6. Beware of hidden fees. Your merchant account provider should disclose all fees in writing. If you don’t agree to an early termination fee you can close your account if you discover hidden fees at a later date.
  7. Perform a Better Business Bureau search before you sign an agreement. If you find a long list of complaints simply walk away from the provider.
  8. Choose a provider that has been in business for at least 10 years. You should ensure your processor will be around when you need them.
  9. Ensure your merchant account provider can provide professional customer service.
  10. Ensure your merchant account provider can provide professional technical support.

Costs Associated with Most Payment Gateways

  1. Discount rate

These tend to vary but mainly play in the region of between 2-6%. These are commissions paid to various players (credit card provider, payment gateway, merchant account provider) who are directly involved with various credit/debit card transactions. These costs largely depend on the company that you are dealing with.

  1. Monthly fees

All gateways come with some form of monthly fees and this is largely dependent on the number of features and services provided by the gateway. For instance, there is the fraud detection feature that comes with extra charges. This particular feature is recommended when accepting payments from individuals and businesses that you do not have a long-standing relationship with.

  1. Per transaction fees

There is some flat rate charged per each and every transaction completed with a credit card.

  1. Setup fee

This is a onetime fee and some service providers have even clauses that enable clients to earn back their set-up fees in case they are dissatisfied with their services.

Today, there are many companies that provide various payment processing and gateway service. We understand that research is key to understanding the one that fits your restaurant perfectly and that what this article provides, first-hand information on all you need to know to ensure you’re dealing with the best payment processing and gateway platform available.

 

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