How does credit card processing work?

While credit cards provide convenience and security to people all around the globe, there are many stakeholders involved in the process of confirming credit card transactions. These third party financial intermediaries drive up fees for merchants, although consumers are also left with the short end of the stick. Six to eight middlemen are typically involved in verifying a single transaction, each taking their cut and reducing merchant cash flows in the process.

The many middlemen involved in a single transaction

The transaction verification process begins when a credit card is swiped at a retail payment terminal or processed over the Internet through an online shopping cart. Such payment gateways are the first intermediary and provide merchants with the ability to accept major credit cards.

A number of other middlemen are involved in verifying a transaction, including credit cards (e.g., Visa, Mastercard) and credit card issuing banks (e.g., Wells Fargo, CITI). Credit card processors, also known as acquirers, act as messengers between merchants and credit card associations. They pass along batch information and authorization requests so merchants can complete transactions. Yet another intermediary is a merchant account provider, or a company that manages credit card processing services (e.g., sales and support). From the payment gateway through to merchant account providers, each party charges its respective fees.

The verification process

Authorisation is the first step in transaction verification. It opens the payment gateway in order to verify the account balance and ensure that the cardholder has sufficient funds available to make the purchase. Next, funds are held in the capture step until settlement is reached. To settle a transaction, a number of banks, credit card companies and other relevant stakeholders must sync relevant transaction activity. The duration of this process can take anywhere from a few days to two weeks, which creates a strain on merchant cash flows.

Transaction fees

Transaction fees are typically charged to the merchant and sometimes to the cardholder. They include transaction fees, flat fees and incidental fees.

Transaction fees are levied every time a transaction is run and are the largest cost of running a merchant account.
Transaction fees, known as Interchange and Assessment fees, are charged by credit cards and card issuing banks. They typically consist of a wholesale and markup fee. The wholesale fee is a percentage of the transaction in addition to a flat fee (e.g., 2.10% + .10). The markup fee could be interchange plus (a fixed mark up like 0.2% + .10) or a tiered markup (i.e., Qualified, Mid-Qualified and Non-Qualified). Some payment systems like PayPal provide blended plans that create one consistent rate and fee. While this can oftentimes be expensive, no monthly fee is charged, which can be worthwhile for small businesses.
Flat fees: Flat fees include the cost to run a point-of-sale (POS) terminal or online shopping cart, as well as monthly minimum fees and network fees.
Incidental fees: These appear on a per-case basis, such as when a chargeback is requested or issued.

Fees vary between different credit card types. American Express usually charges higher merchant fees than Visa and Mastercard, which usually charge approximately 2%. Small businesses usually pay a higher transaction percentage in fees than high transaction volume businesses, such as department stores, major supermarket chains and large online retailers like Amazon.

Fees that are commonly charged to cardholders include international transaction fees, annual fees, late payment fees and interest fees. When a cardholder swipes their credit card in a country that uses a different currency, the credit card company makes a currency conversion and the cardholder is charged in the merchant’s local currency. Additionally, the cardholder is charged an international transaction fee, which is currently 3% through Mastercard and many other credit card companies.

The COTI ecosystem

COTI, Currency of the Internet, has developed the TrustchainTM, a unique base-level protocol which is
highly scalable, extremely efficient and centered around trust. The protocol consists of FinTech
application layers resting on a blockless distributed ledger, which utilises a directed acyclic graph (DAG) data structure. This DAG-based model significantly reduces both consumer and merchant fees while overcoming many of the shortfalls of traditional and digital payment systems.

How does COTI save merchants fees?

The COTI ecosystem has a smaller number of stakeholders and intermediaries than traditional payment systems like Visa and Mastercard, which results in low-to-zero fees. What’s more, reputable merchants exhibiting high Trust Scores incur lower fees in the COTI network. Because of COTI’s buyer-seller protection system, chargeback fees are virtually eliminated, which is also a major cost-saver for merchants.

How does COTI process merchants faster than most credit card systems?

COTI’s DAG-based consensus can handle 10,000 TPS, which enables instantaneous transaction confirmations. Moreover, COTI’s decentralised Mediation System can handle buyer-seller disputes more efficiently and at a low cost. As for merchant rolling reserves, they are held for at least seven days, as compared to 14–90 days with other common payment systems. For cross-border transactions, COTI’s currency exchange provides network participants with continuous access to liquid markets for streamlined digital and fiat currency exchanges.

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