Most of this site is dedicated to explaining how Mastercard and Visa credit card transaction work.  Mastercard and Visa accounted for $1.7 Trillion of the $2.1 Trillion in electronic card payments in the US in 2005 according to the Nilson Report.  The remainder are mainly store cards (without a Mastercard or Visa logo on them), Discover and American Express. 

One of the worst practices of the Merchant Account industry is the use of inconsistent buckets because it is completely deceptive. 

Most merchants are billed on a 3-Tier or 3-Bucket price schedule.  The transactions, which VISA and Mastercard classify into one of 130+ interchange categories (see "What is Interchange"), each with it's own price, are grouped by the Merchant Account Provider into 3 buckets, each of which has a price determined by the Merchant Account Provider (and negotiated by you - see "3-Tier Pricing and "Reading a 3-Tier Merchant Statement").

If you want to process transactions over the internet, you will need a payment gateway.  I often find that people are confused about what the payment gateway does vs. what the merchant account provider does.  I also find that merchants are usually steered by their merchant account provider to a certain gateway because their merchant account provider gets a commission from that gateway, not necessarily because it is the best product for that merchant. 

When I first signed up for processing I had a difficult time figuring out with whom I was dealing.  Who were the guys calling me up and trying to sell me processing services when I first opened the business?  Who were the people on the other end of the phone when I had questions about my bill?  Who decided what rate I got charged?  

One way that processors make extra money is by using a strategy that we call "Marking Up Downgrades". Most merchants are charged for processing services according to a Three Tier Rate Structure.  In a Three Tier Rate Structure each transaction is put into one of three categories: "Qualified", "Mid Qualified" and "Non Qualified".  Transactions classified as "Qualified" will be charged the base rate.  Transactions classified as "Non-Qualified" or "Mid-Qualified" will be charged extra.

Debit Markup is one of the ways that Merchant Account Providers make money from merchants. The reason why Merchant Account Providers make so much money off of debit transactions is that Mastercard and Visa charge the processor less for debit card transactions than credit card transactions.

If you are processing credit cards in a physical environment then you will require a credit card terminal.   Four big pieces of advice:

1. Avoid terminal leases - they are almost always a bad deal.  When credit cards were in their infancy credit card terminals were very expensive and needed to be leased.  These days, the simple kinds of credit card terminals that most merchants need only cost a few hundred dollars, which is the kind of thing for which most small businesses can just write a check.  When you lease you usually end up paying about 4x the actual price (see "Rip Off Leases ").

2. If you decide to switch Merchant Account Providers , you can easily have them reprogram the terminal (it can usually be done over the phone) for free.  Therefore, if you buy your terminal outright, even if you buy it from your Merchant Account Provider, you can always switch providers.  Don't feel locked-in.