How does card processing work?
Card processing works as follows:
Payment processor passes transaction details to the acquirer.
Acquirer sends a request to the customer's bank (the issuer).
Issuer reviews the transaction and comes back with a response: Approved or declined.
What’s an acquirer?
An acquirer is a bank or financial institution that acquires funds from a shopper. It’s responsible for sending the authorisation request to the issuer and passing the response back to the merchant.
Card processing costs
To get the best from your card processing, it’s important to understand the factors that impact the end result. These are processing costs and authorisation rates.
Credit card processing comes with fees.
Processing fee: Charged by your payment provider for processing the transaction. Card scheme fee: Charged by the card schemes for using their network. Interchange fee: Charged by the issuing bank.
These fees vary depending on the type of transaction, your location and business model — to name but a few. It’s confusing, but it can have a significant impact on your bottom line. The good news is that, when it comes to interchange fees, there are things you can do to bring your costs down.
Interchange fees explained
Interchange is usually the biggest expense when it comes to card processing. It’s also the biggest headache, since the structure and fees vary for each market, and they change all the time.
Fortunately efforts are being made to standardise interchange with stricter rules and the introduction of fee caps in various markets. Europe kicked this level of standardisation off back in 2015, and Australia jumped on the bandwagon in 2017.
There are other factors that impact how much interchange you pay.
Just like mobile roaming fees, transactions are generally cheaper if processed locally. So it’s better to use a local acquiring connection if you can to benefit from local regulations and incentivised rates.
Interchange fees vary from market to market. In the US and Australia, for example, Visa and Mastercard grant lower rates to specific businesses like charities, travel agents, streaming services, and utilities. So you want to ensure your transactions are going through under the correct category.
Any savings made will be passed onto you, if your payment provider bills you using the interchange++ pricing model.
What is interchange++ pricing?
This is a pricing model that adjusts based on the interchange rates.
Interchange++ vs Blended
With a blended rate you pay an average processing cost, plus a fixed markup. You’re charged the same price for every transaction, which keeps things simple, but you’re also likely to be subsidising larger businesses that have the leverage to negotiate lower fees.
Interchange++ pricing tracks the interchange rates. So when they go down, your costs go down. And you get to see exactly what you are charged for every transaction — so there’s no danger of hidden costs or additional surcharges.
Card authorisation rates
25% of declined transactions lack valid reasons.
Of course there are good reasons to decline a transaction, like insufficient funds or suspected fraud. But often the card is declined because there was a temporary outage somewhere in the network, or the issuing bank’s interpretation of the payment request was different to the acquirer’s.
So what can you do about it?
The key lies in understanding why the card was declined in the first place. If you have this information, you’ll know if the decline is valid and if not, be able to take action.
This is where your acquirer comes in.
The acquirer is usually another 3rd party provider in the payment process. But, in Adyen’s case, acquiring is built into our platform and we pass the information from the issuing bank directly to our customers. So you can see which card payments were unsuccessful and why.
Here’s an example. An Italian issuer was declining recurring transactions outright because no CVV was submitted. Once we knew this, we submitted the payment with the CVV field included (even though it was left blank). After that the issuer started to approve transactions.
Get the best from your card processing with Adyen
You don’t have to be a payment whiz to turn declined card payments into approvals. And you don’t have to spend time worrying about fluctuating interchange fees. We’ll do it for you.
Our smart data tools are designed to detect downtime and spot irregularities in banking systems. We then use this information to adjust payment requests in real time, maximizing the chance of an approval.
We’ll keep you informed about any changes to interchange rates that will affect you, and our dedicated team monitors rates and regulations to ensure you get the best deal. Plus, our local acquiring licenses in key markets around the world give you access to lower domestic rates.