When you step back to think about how a credit card transaction actually works it’s really quite remarkable.
You swipe, dip, tap, or pin in some information using a keypad, RFID, a microchip, or a magnetic strip.
The dynamically secured banking information is sent from the credit card machine or online payment gateway to the appropriate credit card network that will assign a unique interchange fee to the transaction.
Simultaneously, it’s sent to the customer’s bank to make sure that the necessary funds are available for withdrawal.
The same bank then sends an approved or declined notification back to the credit card machine.
If approved, the funds will be officially removed from the customer’s bank account and deposited into the business’s bank account.
Meanwhile, the credit card processing company ensures the security of each transaction and that the retailer is following all PCI compliance.
And the customer’s bank is using various algorithms to determine the authenticity of every single purchase.
Phew. Oh, and it usually takes less than 10 seconds to complete.
So when your credit card system goes down there is certainly reason to be concerned. Being unable to ring up credit and debit transactions, for even a short period of time, can be devastating to a business. Luckily, POS systems know this! That’s why we have offline mode. And while it’s impossible to run your business entirely the same when you’re offline, there are some easy work arounds to make sure you don’t lose any sales.
Below we’ll look at a brief history of credit cards machines and then get into several ways that businesses can keep functioning even when the internet isn’t.
The modern credit system dates back millennia to help small businesses get off the ground. The Code of Hammurabi, for instance, established rules in 1792 B.C. for loaning and repaying money so that farmers could receive seeds and pay for them after the harvest was brought in.
Though the systems of credit continued to evolve, it wasn’t until the 1930s that we began to see a semblance of today’s modern credit card. In order to identify customer accounts, businesses began using coins or medals with their own name, logo, and the customer’s personal number. They would make an imprint of the coin or medal on a sales slip. Eventually, these simply became small metal cards that could be used to redeem store merchandise on a credit system.
By the 40s and 50s several airlines implemented a credit system to their frequent fliers. And by 1950, Diners Club was founded, releasing the first widespread charge card. Its founder, Frank McNamara, was inspired to start the company after he forgot his wallet for a business dinner. Monthly balances had to be paid in full, though American Express would later allow its customers the option to hold a balance.
How Did Credit Card Technology Evolve?
As we mentioned above, the original credit systems used a medal or coin with identifying imprints. And the original credit cards that arose mid-century were really no different. At first. businesses would simply record the information on the card and make an imprint of the information carried on a credit card. They would then manually add the information at the end of each business day to collect the correct amount from each appropriate bank.
Eventually credit card technology added magnetic strips that helped businesses capture the card information more efficiently. But it wasn’t until the 1970s that credit cards started to really resemble what we know and use today. In 1973 the first electronic authorization system was invented. This allowed transactions to be processed immediately upon purchase, ushering in more security and efficiency.
By the late 1990s, the first wireless machines started hitting the market, giving retailers more flexibility and convenience. Since then, secure online payment gateways have facilitated an incredible rise in eCommerce transactions. And more recently, app-based payments have allowed for mobile wallets and transactions.
The industry has also evolved through various new regulations, but we’ll save that for another blog post. For now, marvel at how amazing this technology is that we use everyday without often thinking twice about it.
How Does a Credit Card Transaction Work?
The process of each transaction takes just seconds, but there is so much that goes into it. And though the cost is frustrating sometimes, when you think about everything that goes into making it happen it becomes a bit more understandable. That’s not to say that many merchants aren’t being overcharged!
At the same time, it also travels to the appropriate card network – Visa, MasterCard, Discover, etc. These agencies are responsible for setting the interchange rates (variable fees based on the inherent risk of any transaction). This assigned fee, typically constituting the bulk of a credit card processing fee, will be attached to the final processing total after sales are batched.
Lastly, the card information will be sent to the issuing bank (the customer’s bank) to check for sufficient funds and any fraudulent activity.
The issuing bank then sends the official response back to the merchant’s terminal where the card will get an approved or declined response.
If approved, the transaction will be queued for batch processing at the end of the business day. The funds will be released from the issuing bank and deposited to the acquiring bank (the merchant’s bank) with all processing charges deducted from the total. These are usually completed within 24 hours of the transaction.
So What Happens to Credit Card Processing When the Internet Is Down?
All of the technology that got us to where we are today is erased once the internet is down. Without the internet there is simply no communication between the credit card terminal and the card networks, processor, or banks.
And depending on your city, downed internet can be a daily occurrence. A lot of major cities have constant repairs or bottlenecks that inhibit credit card sales. So it’s important to be prepared.
This doesn’t mean, however, that your business is temporarily shut down. There are some easy ways to work around the issue until your internet connection is back up and running.
What’s the Difference between Online and Offline Mode?
While a hiccup in internet service is never ideal, it doesn’t mean that your business is helpless. With the right retail point of sale and peripherals, you’re nearly able to operate as normal.
Beware of offers, though, that say that credit cards can be processed offline. Being offline means that you have no internet connection and therefore no communication through your WiFi.
During normal online times, your business can operate as normal with a full connection to your wifi. All transactions are processed through the card terminal and sent to each respective party through the WiFi.
How Can Business Run on Offline Mode?
Now, as we said, being offline doesn’t mean that you can operate your business exactly as you normally would. But there are some ways that you can get quite close to doing so. Businesses can use store & forward, add a phone backup, get an additional internet line or load balancer, set offline mode limits, and use voice authorization through their processor. Read below to learn more.
Use Store & Forward
Most modern cloud-based POS systems can store card information even when offline. This does NOT mean that the transaction will be processed in real-time. Instead, it’s simply stored and then processed as soon as the POS comes back online.
Add a Phone Backup
Most credit card terminals also have a port for adding a phone extension. This wired version means that your store will only be set back technologically 25 years instead of 50. All transactions can be processed in real-time, but you’ll be going back to a dial up connection and each sale may take a few minutes. Still, it’s better than nothing.
Get a Second Internet Line and Load Balancer
These days, it’s surprisingly easy and affordable to add a second internet line. Retailers can typically do so for under $50/month. This allows your terminal to connect to the other network automatically anytime one is offline.
Additionally, a load balancer helps distribute any traffic going through your networks. This increases the overall speed and ensures you have the fastest transaction time possible.
Set Limits to Offline Mode
While store & forward is a great tool to have, it does increase the chance of fraudulent transactions. If a card is declined or cancelled, there is virtually no way of retrieving compensation from the customer after the fact.
Therefore, it’s important to set limits on the value of all store & forward transactions. Automatically set these in your POS system to avoid costly losses.
Use Voice Authorization
One common work around for the larger transactions during offline times is to use voice authorization over the phone. It’s time consuming and will hold up your checkout line, but it does ensure that a particular transaction will go through. A merchant can call their credit card processor who will then manually run the transaction for an additional fee.
What Should Merchants Watch Out for With Offline Mode?
While the tips above make being offline a whole lot more bearable, there are still some issues to watch out for when offline.
No transactions are authorized in real-time. All transactions are instead stored in the POS to be authorized once the internet is back up and running. This means that any declined cards will result in lost sales.
If a sale is processed offline but disputed by the cardholder, the sale will almost always result in a chargeback, again leaving the merchant on the hook.
Voice authorizations can be a huge pain and will come with premium surcharges.
The back office features and analytics of your POS will not be available offline.
If you don’t set specific limits on offline transactions, cashiers will be able to store & forward every transaction.
During periods of longer internet outage, such as a natural disaster, speak with your credit card processor. Store & forward charges are not kept indefinitely.
Use these tips to run an efficient business and avoid lost sales. With the right POS, it gets a whole lot easier. KORONA integrates with all payment processors, so you can find the best fit for your business. Plus, we’ll help you get your payment terminals set up with extra lines and make sure you’re prepared in the event of any internet outages. To learn more, click below to start your free trial.
Among other things, Michael writes about trends and tips in retail for KORONA POS. His focus is on bringing small business owners a more holistic approach to growth. In his spare time, you'll find him hiking somewhere in the southwest. Connect with him on LinkedIn: https://www.linkedin.com/in/michael-chal/