Cash payments declined to 18.6%, down from 25.8% in 2019, according to the latest data. Digital payments, including the use of credit cards, continue to grow, and so does the fraud associated with them. According to the FTC, there were over 4.7 million reports of fraud recorded in 2020. And just recently, the details of 1.2 million stolen credit cards were released on the dark web.
With the increase in cybercrime and the rates of cyber insurance, many may wonder if swiping their cards may not be as secure as implied by banks and merchants. So you have an understanding of what happens once you swipe your card and what organizations are involved in the process, here’s a breakdown of the basic steps.
Authorization or Approval
Most retailers, also called merchants, accept at least one type of credit card, and many have expanded to take all four of the major cards used in the U.S. When you swipe, tap, or insert your card, the first stage involves obtaining authorization or approval.
The terminal used to pay with a card is known as a point of sale or POS terminal. That terminal sends the details of the card you swiped to the bank or processor through a phone line or internet connection. Typically, the bank or processor forwards the card details to the network of credit cards within a few seconds. This action allows the network to clear the payment request and seek authorization from the bank that issued the card.
Authorization requests include key details:
- Credit card number
- Billing address or ZIP code
- Credit card expiration date
- Credit card security code (also called CVV)
- The requested payment amount
These details protect the cardholder from unauthorized purchases, as well as ensure that the account can support the requested payment. If the account isn’t in good standing or the purchase amount exceeds the credit limit, the request will not receive authorization. On the other hand, if all details match up to the information on the credit account and the issuing bank sends approval, the transaction is considered authenticated.
Settlement and Clearing
After authentication, the next step in the process involves settling the transaction with the card issuer. The merchant who conducted the transaction will see proof on the processing statement, while the cardholder will also see the transaction on their credit card statement. This happens through a process known as batch settlement, which usually happens at the end of each business day. A merchant sends all approved authorizations to the acquiring processor or bank. The processor routes that information through the credit card network, where all approved transactions are sorted to the appropriate issuing banks.
After receiving the transactions, issuing banks transfer funds to the credit card network, often within 24-48 hours of receipt. However, the amount transferred is minus the interchange fee, which the bank shares with the credit network. The network then credits the acquiring bank or processor, and the funds are credited to the merchant’s account. When the cardholder receives their monthly statement, they’re responsible for paying for all the transactions they committed during the billing period, which returns the funds to the issuing bank.
Associated Costs and Fees
As mentioned, credit card processing comes with several fees. These fees can impact smaller businesses, particularly on low-value transactions, so some merchants require minimum purchases with credit cards. Other companies mark up prices in exchange for accepting credit cards so customer payments make up the added cost.
The most common fee associated with accepting credit cards is called the merchant discount rate. This is the fee paid by a merchant in exchange for service provided by acquiring processors. The rate is often between 2% and 3% but can be as high as 5%. It includes the interchange fee paid to the issuing bank and assessments charged by credit card networks, as well as any markup issued by acquiring banks and processors to cover the cost of facilitating transactions.
Credit card customers also have the right to dispute charges made on their credit cards within 60 days of the statement. If a customer disputes a charge or otherwise makes a complaint against a merchant, that merchant may face a penalty charge of $10-$50. This charge covers the cost of retrieving the data. When a merchant fails to respond to the request, additional fees may apply.
Theft and Extortion Risks
Hackers, cybercriminals, and thieves work to get the credit card details of unsuspecting individuals, using their cards to make unauthorized purchases. The authorization process can lessen these risks, as the cardholder must provide certain details to get approval. But theft and extortion can still happen, especially if someone steals the physical card or gets access to all the details of a transaction. Most credit card issuers have protections in place for unauthorized charges that protect cardholders from being held financially liable.
Contact Quaker to speak to a specialist about cyber insurance programs that protect businesses and consumers against these types of security breaches.