Understanding Payment Processing

October 17, 2018

Payment processing is an industry growing by the day. Given the many different ways patients can pay their bills, the whole system can get a bit confusing.

‍Life is easy when a patient plunks down cash. You collect it, file it with the day's deposit, and your bank account goes up.

Credit card payments are a bit different. Because of all the different ways somebody can pay with a card the fee structure can vary.

In other words, not all card transactions are created equal.

In order to make sense of it all, we've broken down everything regarding payment processing — from the parties involved to the reasons behind different fee structures.

Though still intricate, hopefully this helps you get a clearer picture of what happens whenever a patient pays their bill.

The Basics

Parties Involved in Payment Processing

Many players help move sensitive credit card information safely between patients and practices.

The main entities involved are:

Merchant Banks – These link your payment processor. Merchant banks facilitate the processing of payments from your patients to you.: Don't confuse merchant banks with where you deposit money. Sometimes these institutions offer their own merchant accounts, but not always.
Credit Card Networks – These companies own credit cards, and often have their own servicing. They work to reduce risks. They also inform the institutions of card activity.
Gateway Providers – These connect websites, or other processing methods, to the payment processor. Sometimes it's one company that serves as a merchant bank. They're also gateways that process payments without any outside connection.
Customer Banks – The bank of the payer, also known as an issuer.

How Processing Works

All of these components help ensure a safe transaction. They also help to reduce the risk of fraudulent activity.

For the most part, you can sum up payment processing in six steps:

A patient enters their credit card information and submits it.
A payment gateway will encrypt their info to help secure the information.
The payment processor, provided by the merchant bank, will authenticate that information to make sure everything is legitimate.
Next, the payment is sent to the patient's bank or credit card network to authorize the transmission of money.
Once the patient's bank has legitimized the payment, funds are transferred. This is called a settlement.
The funds are deposited on your account and you're good to go!

Steps 1-4 happen immediately, provided there's no suspicious activity.

Settlement usually occurs within five business days. It's also normally faster with major bank institutions.

Payment Processing Fees

There are several ways a company may collect fees. That said, fees average around 2.9% + $.30 per transaction.When assessing your fees, here are some of the main ones to consider:

Interchange Fees

These are fees assessed by the issuer. They can depend on numerous factors, such as industry, sales amount, the credit card network (for example, AMEX, MasterCard, different types of reward cards, etc.).Interchange fees often include a variable fee as a percent of the amount being paid. They'll also have a fixed cost per transaction.

Assessment Fees

A credit card (Visa, MasterCard, etc.) charges its own fee. Normally it's less than 1%, but still has an impact over time.

Assessment fees usually roll into the interchange fee.

Other Fees

Sometimes, intermediary websites or companies will assess fees. This middleman facilitates transactions between patients and your practice, with their fees coming from external services offered.

This can include, PCI compliance fees, monthly fees, data fees, and refund fees.

These fees can vary depending on how the transaction is executed. You must also consider the differences between payment methods.

Different Ways to Pay

Every payment method comes with inherent risks. Risk can change depending on the way you enact payments.

Below is some info on what you can expect depending on different online payment methods:

Card-Present Transactions

The lowest risk transactions come from cards scanned through a reader. Because of this is, there's often a fee between 1.2% and 1.9%, as well as a lower fixed rate.

These transactions are the lowest risk because, as the name implies, they require a card to be present. You can check a patient's information against the card, and then choose whether to process the payment.

Virtual Terminal Transactions

Virtual terminal transactions still require the card to be present. They're transactions on a machine, and risks tend to be slightly higher.

Lack of a person-to-person interaction presents an increased risk. As such, the provider assumes any risk for fraudulent activity.

Fees for these transactions are usually between 2.0% and 2.7%.

Online Payments

Online payment fees are a little higher, normally between 2.7% and 3.5%, for much the same reason as virtual terminals. However, they are without the supervision of the location and card presence.

‍Online payments require more overhead to maintain a secure transmission of information.

Payments Without a Card

Lastly, we have keyed-in transactions, or payments that do not require a card. Know as card-not-present transactions, these present the highest risk for fraudulent activity.

Keyed-in transactions can often warrant a fee up to 4%! The majority of all the payment industry charges more for card-not-present transactions than online payments.

Why?

Because it's more likely to transact fraudulent activity due to lack of verification to take the payment.

With online payments, you have to verify certain information to exchange goods and/or services in most cases such as billing address and phone number.

When the card is present, merchants usually do their due diligence.

Keyed-in processes do not have these verification safeguards. For that reason, they possess more risk and contain more expensive remedies for the players mentioned above.