From a business's point of view, credit card processing is an amazingly straightforward system — swipe, sign, and the customer leaves with her purchase. However, making a customer's experience so hassle-free requires a complex array of companies working behind the scenes to ensure that credit card payments are processed securely and efficiently. This article aims to give a sense of the players involved in keeping this system running smoothly, and to shed some light on what credit card processing fees actually pay for.
- Card Brands (Visa/MasterCard)
- Issuing and Acquiring Banks
- Credit Card Processors/Merchant Acquirers
- Independent Sales Organizations (ISOs) & Member Service Providers (MSPs)
Card Brands (Visa/MasterCard)
For all of the advertisements produced by major card brands, companies like Visa and MasterCard are in many ways the players furthest removed from both businesses and consumers in the chain of credit card processing. These companies don't issue credit cards or set the interest rates that consumers pay, but their services are indispensable to making sure that businesses get paid when customers use their credit cards.
Visa and MasterCard are each publicly traded companies that work to make credit card processing as efficient, fair, and safe as possible - while also earning profits for their shareholders, which they do by influencing consumers to use credit cards as much as possible. As it relates to your business, the card brands:
- Set the interchange rates and assessment fees that a business pays to process each transaction. This is the biggest component of what it costs a business to accept credit card payments, and it's also not negotiable — no matter who does a business's credit card processing, it has to pay the same interchange and assessment fees.
- Build and maintain the networks that banks use to move money.
- Protect consumers and merchants from fraud. Visa and MasterCard go to great lengths to keep private data out of the wrong hands and prevent criminals from using any data they might get.
- Determine the rules and regulations merchants must follow when accepting credit card payments, many of which are designed to prevent merchants from discouraging credit card use. For example, Visa and MasterCard prohibit merchants from setting more than a $10 minimum for credit card purchases in order to maximize the use of their cards.
- Manage chargebacks and facilitate dispute resolution between merchants and banks.
Discover and American Express carry out similar functions within credit card processing, with the biggest difference being that these smaller brands extend credit and pay merchants "in house." Visa and MasterCard, however, are only responsible for handling transactions that come from the next players in credit card processing, issuing and acquiring banks.
Issuing and Acquiring Banks
Issuing banks issue credit cards to consumers, while acquiring banks, in a sense, extend credit to businesses. Issuing and acquiring banks are members of Visa and MasterCard card associations, which allows them to pass transaction information back and forth using the card brands' network.
From a merchant's perspective, here's how the process works:
- When a consumer uses a credit card to make a purchase, the issuing bank receives information about the transaction. The issuer then either approves the transaction and reserves the funds in the customer's account or denies it.
- At the end of each business day, the merchant's acquiring bank deposits money into the merchant's account for all approved transactions.
- The acquiring bank later "settles" with the issuing bank; the acquirer receives money from the issuing bank, and this process is facilitated by the card brand. The issuing bank is reimbursed when the consumer pays his credit card bill.
- The whole process, from the moment a card is swiped to the moment the money winds up in a business's bank account, can take anywhere from 24 to 72 hours.
You'll notice that in order for everyone to get paid, banks have to send and receive data about every transaction made using credit cards. Instead of doing this themselves, many banks employ the services of credit card processors to collect this information from businesses and transmit it to the banks.
Credit Card Processors/Merchant Acquirers
When consumers use their credit cards to make a purchase, credit card processors move the information about every transaction to the parties who need it. In a sense, these are the "mailmen" of credit card processing.
When a merchant makes a sale paid for with a credit card, the credit card processor:
- Sends details about the transaction to the issuing banks (over the card brands network)
- Receives either the authorization or decline from the issuing bank and transmits it back to the merchant
- Sends authorizations to the merchant's acquiring bank for settlement (again, over the network maintained by the card brand)
Credit card processing companies tend to be quite large — some earn more than 1 billion dollars in revenue annually. This revenue comes from the markup that merchants pay — a fee over and above what's charged by the card brand. Unlike the interchange fee, this markup can vary from processor to processor.
While merchants can contract with large credit card processors directly, they can also contract with smaller independent sales organizations and member service providers.
Independent Sales Organizations (ISOs) & Member Service Providers (MSPs)
When businesses want to be able to accept credit card payments, they will often work with independent sales organizations (ISO) or member service providers (MSP) — names that generally mean the same thing. Companies registered with Visa call themselves ISOs, and companies registered with MasterCard are labeled MSPs — most of these companies are registered with both brands, and will call themselves an ISO/MSP to reflect that. These companies act as the sales force and front-line service providers in the credit card processing industry.
While most don't perform any actual processing themselves, ISOs/MSPs are resellers that provide services to businesses that large processing companies are often unable to offer. The best ISOs/MSPs:
- Set up and maintaining point-of-sale terminals.
- Keep businesses in compliance with bank and Card Association regulations. This is no easy feat — the latest MasterCard operating procedures, for example, consist of over 1200 pages of rules — and these can change often.
- Tailor processing services to meet merchants' needs.
- Provide customer service, often acting as the first point of contact for merchants with questions about accepting credit cards.
Most ISOs/MSPs don't actually handle processing though some are large enough to do so. A single ISO/MSP might resell the services of many processors; likewise, a single processor contracts with several different ISOs/MSPs. These companies earn money by adding another markup on top of interchange fees, and while the best ISOs/MSPs deliver excellent service and value to merchants, the worst use underhanded tactics to hide the fees they charge for credit card transactions (and deliver terrible service as well). Cardfellow only deals with processors that use pass-through pricing — the most transparent model available. Find more details about this pricing model (along with some of the tricks used by processors to hide their fees) here: Interchange pass through.
Aggregators are another option for businesses that would like to accept credit cards but do not want to contract with a processor or an ISO/MSP.
Companies such as PayPal and Square serve thousands of merchants under a single merchant account. When a business takes payments through an aggregator (such as PayPal, for example):
- The consumer pays the aggregator for the good or service provided by a merchant. This could either be by using a credit card in a traditional sense, or by using money the consumer has "stored" with the aggregator.
- The aggregator acts as the merchant in the sense that they have an account with an acquiring bank which deposits money for each purchase in that account.
- The aggregator then passes that payment along to the merchant, minus any fees the aggregator charges (on top of any interchange and processor fees).
Aggregators can be a great solution for very small businesses or those that would have difficulty establishing a merchant account with an acquiring bank, but can wind up costing more than traditional processing services.
Hopefully, you've gotten a sense of the various layers that exist within credit card processing, along with the role that each of the parties plays and what you're paying for with all of those fees. If nothing else, remember that the "high level" players — the card brands and, to an extent, the banks — offer fairly standard services, charge fees that aren't negotiable, and tend to be further removed from merchants. The "low level" players, on the other hand — processors and ISOs/MSPs — can offer services more tailored to specific businesses, have different pricing models, charge different rates, and can ultimately impact a business's bottom line to a much greater degree.