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Credit Card Processing

Credit Card Processing Service and Information

Step-by-Step Guide

Maybe you've just opened shop. Or maybe you've been in business for years. Either way, if you're about to accept credit cards from your customers you're in good company.

Here's why:

It's easier for customers to pay you. Plus, they often spend more.
• You can accept orders by telephone or Internet.
• Your business enjoys enhanced credibility.

This tutorial has been written to help you get the most from credit card processing. It explains how the process works.
Plus we outline your rights . . . your responsibilities . . . and how to control the risks (yes, there are risks).

Some Definitions

Every business has its vocabulary. This is ours, starting with the parties in transactions:

Your customer, the "Cardholder" obtains his/her MasterCard or Visa credit card from an "Issuing Bank" (the bank that issued the card to the Cardholder.)

You, the Merchant, obtain your "Merchant Account" from a "Sponsoring Bank" or an "Acquiring Bank" (both referred to as
"Merchant Banks"). Merchant banks "sponsor" you as a business qualified to accept credit cards.

"Processors" are companies that process the credit card transactions through the bank system for you.

The "Net Settlement Amount" is the amount deposited into your account after a sale. It's the transaction amount less the "Discount Amount." Part of the discount amount is your "Discount Rate," a small percentage of each credit card sale set by the processor is taking out and usually is in the ballpark of 1.6% on up. 

"Pass-through fees" are occasionally a nasty fact of life. They're the fees added on to your basic discount rate by Visa and MasterCard whenever a transaction didn't meet certain requirements for your basic transaction (such as failure to use the Address Verification System). These "pass through"  these are charged at the end of the month, not every day, so your daily reconcilement is easier and you have "float time."

In general, credit cards are processed as "magnetic" transactions or "non-magnetic." Magnetic means that the card is swiped through a POS terminal in a face-to-face transaction. It is the safest and cheapest processing option. On the other hand, non-magnetic transactions (aka "keyentered") are those used in mail order/telephone order, Internet, or telephone processing, where cards aren't present and usually yield a higher discount rate because of risk issues and fraudulency.

Credit Card Processing in 5 Easy Steps

When a credit card is used for payment, the following process occurs (usually in a matter of seconds!):
1. You submit an "Authorization Request" with a point-of-sale (POS) terminal, PC software, telephone, fax, Internet, etc.

2. We electronically links to the Visa/MasterCard network to transmit the authorization request to the issuing bank.

3. The bank verifies that the account number is valid and that the transaction amount does not exceed the cardholder's credit limit. The authorization also puts a "hold" for the funds on the cardholder's credit limit.

4. You transmit a deposit transaction. Note: If you operate face-to-face with customers and deliver the merchandise or service immediately, the authorization and deposit occur simultaneously as a "sale" transaction.

5. The money is deposited as a net settlement amount into your bank account at your sponsoring bank.

Responsibilities and Rewards

You've seen how transactions work. Now we'll step back and review what keeps the whole credit card system together, namely:
Built-in Protections


Credit cards offer protection for you, your customers, and the banks involved. In fact, protection is why credit cards are safer for everyone.

• Merchants
When you accept a credit card (and the transaction is authorized) you can be sure you'll receive the funds. (Later, we'll discuss disputes where funds go back to the consumer.)

• Banks
The credit card system protects issuing banks from unscrupulous merchants. When you submit a deposit, you are promising the issuing bank that you have delivered the goods and services promised to the cardholder. If you don't, the issuing bank has the right to charge back the transaction.

• Consumers
Cardholders are protected from merchants who fail to keep their promises. They're not liable for payment if a merchant fails to deliver as expected.


Trust holds the credit card world together. The issuing bank doesn't ask a cardholder if he is satisfied before you get your money. They TRUST that the cardholder will be satisfied. Here's how you earn that trust: When you sell by credit card, you must deliver on the cardholder's "expectations" (note that word!) of your goods and services.

"What expectations?" Think about it. Either by policy or by practice, implicitly or explicitly, you tell customers that they can expect a level of quality, delivery times, etc. By accepting a credit card for payment, you are promising the issuing bank that you are going to "make good" on those expectations. If not, your customer can get his money back.

Chargebacks - Customer Wanting Refunds

Almost everyone has an idea of how a credit card SALE works. But even some experienced merchants don't know the other side of the system: chargebacks. Understanding chargebacks can save you a lot of money. And help to salvage customer relationships.

If a cardholder believes a charge isn't legitimate, or that her expectations weren't met, she could come to you for a refund. But she has another, more troublesome, option: Chargebacks.

Here's how chargebacks work: Regardless of merit, the issuing bank is obligated to investigate complaints from cardholders, including:

• You never delivered the goods and services you promised her.
• She never ordered the goods that showed up on her credit card bill.
• She received the goods and services, but they didn't meet her expectations, so she wants a refund.

In these circumstances, the issuing bank initiates a Retrieval Request and/or a Chargeback to resolve the matter.

Common Causes of Chargebacks

Some common causes of chargebacks can be avoided easily:

If your company name appears one way on your advertising and your receipts, but a different way on the customer's credit card statement. Call your processor to fix this) In some cases, this problem results from two businesses attempting to process transactions from the same account. This is frowned upon, so call us if you have a second business.

When you charge the customer before the goods have been shipped. In other words, don't submit the "deposit" transaction before you have shipped the goods or performed the service.

Credit Card Disputes: Retrieval Requests

Traditionally, the dispute process begins with a Retrieval Request that asks for documentation.
1. The issuing bank sends a Retrieval Request (often called simply a "Retrieval") to the processor Sometimes, they start with a chargeback and skip the Retrieval Request altogether.
2. The retrieval asks for proof that you delivered the disputed goods or services to the cardholder.
3. When you provide proof that you delivered the goods or services to the cardholder it is forwarded to the issuing bank that informs the cardholder. The proof is usually a document (delivery receipt, credit card receipt and/or your store receipt) signed by the cardholder.
TIP: Reply PROMPTLY to these requests. Late responses almost always result in chargebacks.
4. At this point, the complaint is usually dropped (but not always).

When You Can't Prove The Customer Wrong

If you don't have documents for the retrieval, or if you don't deliver a copy of the documents to your processor in time, the cardholder is deemed to be right. When this happens, several things occur:
1. The issuing bank submits a chargeback to your processor through the Visa/MasterCard network.
2. Visa/MasterCard debits the original transaction amount from your bank account. (Or, it is deducted from your most recent deposit transactions).
3. Your sponsoring bank records the chargeback on your account record. Besides the obvious financial loss to you, chargebacks are also bad because of that final step. Here's why. Everyone in the credit card system knows that eventually a few transactions will result in chargebacks. They're a cost of doing business. But, if you cause too many chargebacks, the credit card system will start to doubt you and your standing as a credit card merchant. When chargebacks become too prevalent, your merchant account may be terminated by your sponsoring bank. Then you may find it impossible to find another sponsoring bank. In other words, no more credit card acceptance. Ouch!

Chargebacks and Timing

In most cases, chargebacks must be initiated within 120 days of the original transaction. However, if a merchant is alleged to have violated Visa or MasterCard rules, a "compliance" case can be disputed up to 180 days after the rules violation.

Fraud: The Best Way to Avoid Chargebacks

Preventing credit card losses is not only good for you, but it is also part of your responsibility. Here are some general guidelines on how to prevent fraud and avoid chargeback situations.

Make sure that the credit card is from the legitimate cardholder . . . Not just someone who knows the card number, or has stolen the actual card.
Verify signatures (for face-to-face transactions) on the card and on the receipt signed by the customer.
Take special care with non-magnetic transactions like telephone orders, mail orders or Internet orders.
Know your cardholder personally … if at all possible.
If applicable, use the Address Verification System and verify the Security Codes (also known as "Validation Codes") on the card (This prevents many pass-through fees).
Obtain a signed receipt from the cardholder and, if applicable, a signed proof of delivery from the shipper for delivered goods.
Protect your merchant ID and terminal ID so no one submits transactions without your permission.
Don't accept expired cards (or accept cards before the effective date!). The date shown on the card is the "good thru" date and is good through the last day of that month.

More Tips to Avoid Chargebacks

Make sure shoppers know your warranty and return policy. Make sure YOU consistently live up to it. When consumers can resolve problems directly with you, you avoid the hassles of dealing with chargebacks.
If you have a "no refund policy," the customer must acknowledge this with a signature. The words "No Refunds" must be printed at least 1/4" high and be within 1/4" from the signature space.
Do not submit a deposit transaction until you deliver the goods or services.
If you rent equipment or sporting goods, do not attempt to cover damage to your products by charging the customer's credit card without doing the following: You must run a separate transaction for the damage after swiping the card again and having the customer sign a separate sales draft and invoice for the damage claim. You must never attempt to charge for damage or loss using only the credit
card draft obtained when performing your rental transaction . . . NEVER.

Keys to Keeping a Good Account Status

Your processor and sponsoring bank expect you to be honest with your customers (thereby managing "expectations"). And you're expected to live up to your bargain.

This translates into four requirements:

Fulfill your shipment dates and commitments to your customers.
Promptly respond to requests for refunds according to your policy AND submit the appropriate credit transactions to your processor. Do not refund a customer with a check or cash.
Prevent fraud
Only charge cardholders after delivery of the goods or services.

For Further Information

We support our merchant customers with round the clock access to highly-qualified assistance. To reach customer support, please call:

E-mail Customer Support at.

How To Conduct Credit Card Transactions



Rule No. 1: Every sale requires both an authorization and a deposit.
Rule No. 2: Always note the Authorization Code. An Authorization Code indicates that the cardholder has the credit to pay for the purchase. This assures you of payment, as long as:

A valid card was used by the authorized cardholder.
The cardholder (not someone else) has signed a sales draft.
The signature on the sales draft was matched against the signature on the back of the card.
You have proof that the card was present (a receipt created by your printer as the result of a magnetic stripe read, or an imprint of the card created by your imprinter.) You won't have this for mail order, telephone order, etc., increasing the risk.
The transaction is not disputed later by the cardholder. (If this happens, you'll have to fight for your money through the chargeback process.)

When the goods or services are provided at the time of the sale, the authorization and deposit are simultaneous. However, if the customer is paying hours or days before she'll receive the goods or services, transact the authorization first: this reserves the amount from the cardholder's credit balance for you. Perform the deposit transaction when the goods or services are delivered.

TIP: To avoid a pass-through fee on the transaction, make sure you deposit as soon as possible after the goods are delivered. After three days, the pass-through will be applied, but that's no excuse to make the deposit before the goods are shipped. Do not wait longer than 30 days, or you'll need to obtain a new authorization.


Deposits take funds from the cardholder's credit line and deposit them into your account. For an in-store purchase, the deposit is simultaneous with the authorization (unless the goods will be delivered at a later date

REMEMBER: In mail order or telephone order businesses, the deposit must not be run until the goods are shipped

When Are Funds Available? We thought you'd ask. Visa/MasterCard funds are posted to accounts at the sponsoring bank two business-days after the date of the transaction. There's one additional business day if you are eligible to have funds deposited to your local bank.

Handling Sales Drafts

A sales draft is a legal and binding contract between you and your customer. If you have a retail store, a sales draft must be completed and imprinted for every credit card sale. So, even if you're not using a POS terminal that prints a draft for you, you should still imprint the card and obtain a customer signature on a sales draft, transaction Slip.

For your protection, a manual imprinter can be used to imprint the credit card when any of the following are true:
You're not using a POS terminal
You have to manually enter (not swiped) the credit card information into your POS terminal
You do not have a POS printer
You are accepting credit cards which are not electronically deposited (Diner's Club or Carte Blanche) Information That Must be on a Sales Draft
Credit card number (recorded from the card's magnetic strip or imprinted)
Authorization Code and Reference Numbers
Signature of customer
Card expiration date
Date of sale
Amount of sale, including tax
Description of goods/services

Storage of Sales Drafts

Keep drafts for three years (even if you sell your business), and even then, check with your accountant for guidance before destroying them. In case of a chargeback, you may be required to produce sales drafts quickly, so file them so they're easy to find.

TIP: Keep the white copy of all receipts: they photocopy better. Also, handle carbonless paper and carbon/silverback paper carefully. Pressure on the paper during handling causes black blotches that make your documents illegible.

TIP: You will be asked to find chargeback documentation based on the card number, transaction date, and amount of the transaction. Therefore, filing your retrievals by cardholder name will make your research process more difficult unless you also have a cross-reference system.

Protecting Cardholder Information

We've all heard about companies who have become victims of thieves who steal credit card information stored by merchants. To avoid this, your responsibilities to safeguard data include the following:

Don't share, sell, purchase or exchange cardholder names and account numbers in any form.
Secure all records, electronic or otherwise, that include cardholder names, account information, transaction information etc. to prevent access by anyone other than your processor.
Never store magnetic stripe data. In the electronic commerce arena, a number of best practices to help protect data from unauthorized access include:
Encrypt cardholder data and only store that data in encrypted form.
Back up files only in encrypted form.
Secure encryption and communication keys in a secure hardware device or tamper-resistant security module.
Limit personnel access to computers.
Encrypt and decrypt within a secure hardware device. This isolates the encryption keys and minimizes their exposure.
Manage all keys using split knowledge and dual control so no one person can have access to data in the absence of other employees.
Protect access to file servers.

Watch for Skimming!

Skimming is the act of capturing card data and then using the data to create counterfeit credit cards, or to make purchases. Typically, a crooked employee such as a store clerk or restaurant waiter will use a small device, such as a Personal Digital Assistant equipped with a card reader, to swipe a customer's card when no one is looking. The data
can then be re-injected onto a magnetic stripe on a fraudulent card.

While skimming is often a high-tech endeavor, it has a low-tech angle as well. Simply put, an employee who gathers credit card information and writes it down is just as much of a threat as his tech-savvy counterpart. Prevent this from happening. MasterCard will assess fines on merchants who are determined to be a "point of weakness" in preventing employee fraud.

Meanwhile, Visa pays a reward of $1,000 to anyone who provides information leading to the arrest of a "skimmer," so it can literally pay to be vigilant about employee fraud.

Balancing and Reports

You should review your credit card drafts at the end of each day or the beginning of the following day. No matter how reliable your processor (and we ARE reliable), you want to make sure that each transaction was properly processed. This can save you lots of grief at the end of the month, and help ensure you're getting proper credit for your sales.

Compare the total dollar amount of the drafts to the total amount you processed for the day. If you have a POS terminal printer, you can print both detail and summary reports of your day's transactions.

Your Merchant Account and Bank Deposits

When you begin processing you designate the bank account where your funds will be deposited (the sponsoring bank or, when permissible within underwriting guidelines, another bank of your choice). No matter where your funds are deposited, we recommend you always leave a balance in your bank account as a "buffer" to ensure funds are available for monthly transaction fees, chargebacks, etc. 

Each day's VISA/Master Card transaction total will appear on your bank statement. Since your VISA/MasterCard discount fee is deducted daily, the deposit shown is your net deposit. Discover and American Express deposits are listed separately. Your processing agreements with these companies control the payment of your funds.


You will receive a Monthly Statement ("Automatic Deduction Notice") detailing the month's total debit to your account. That debit to your bank account occurs on the first banking day of each month and transaction fees, Visa/MasterCard pass-through fees, supplies, etc.

Seasonal Business

We take pride in offering the best possible solution to obtaining and getting you started in accepting credit cards, debit, checks…etc. We have many solutions for the merchant and believe we can provide the best solutions and information if we can't get you approved.

See ECHO Credit Card Processing, Suite of ECHO Services

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