Issuing Banks: Where Your Money Goes

If your business charges credit cards, you pay fees. This seems straightforward enough on its surface — you might assume it’s as uncomplicated as Visa or MasterCard taking a cut of your sales. It’s not really as simple as all that, though. In actuality, a variety of entities are working behind the scenes, and it’s the card-issuing bank that ends up taking the largest piece of the pie. The more you know about what affects your business, the better armed you are to improve your position in the market and protect your income.

Before we break down exactly how credit card processing works and where the money is going, let’s examine the businesses and individuals involved. There are more people than you might realize between you and the card brand.

Let’s break down where each of these comes into play when a transaction is made.

A person swipes his credit card at your business. Those funds are transferred to your account by what is called the member bankacquiring bank, or merchant bank. They are in turn funded by the card-issuing bank (the same one that issued the card to your customer.) Think Bank of America, Wells Fargo Bank, JPMorgan Chase Bank and Citibank. These card-issuing banks (which are stakeholders in the card brands) issue credit and debit cards to individuals in the brand name — the cards don’t come directly from Visa or MasterCard.

The following chart from First Annapolis Consulting shows a snapshot of card-issuing banks as of the second quarter of 2011.

Card-Issuing Banks, Q2 2011

The large card-issuing banks also work with the card brands to determine “interchange fees“, which we’ll discuss more in a bit. This partnership of the card brands and card-issuing banks also determines the guidelines and rules for how acquirers (the companies that provide you with your merchant account) may operate.

So far, we have three tiers of financial institutions — the card brand, the card-issuing banks, and the member bank. Here’s where a new party comes in: third party credit card processors. First Data, Global Payments, NPC, and other companies of this type are hired by member banks to carry out the actual credit card transaction between your customer and your bank.

Finally, we have acquirers, independent sales organizations (ISO), and agents. These are the people you are most likely to actually deal with. Oftentimes, when a business owner refers to their credit card processor, they mean these people. Although, as we’ve discussed, they don’t actually process transactions at all.

Acquirers source and maintain merchant accounts.

An independent sales organization (ISO) resells processing services. They may or may not be registered with Visa and MasterCard to sell services under their own name.

Merchant level sales agents (MLS) are individual professionals who don’t work for any particular company. They find businesses like yours and set them up with services from an ISO, in return receiving a residual commission. Sometimes, agents are also your point of contact for customer service.

So, these are the various gears and cogs that make the wheels turn on a credit card transaction. Now that you understand all of that, we can break down exactly how your credit card processing fees are calculated. Of course, when you use CardFellow, all of the fees are laid out in detail for each processing quote you receive. We do all the legwork for you.

When a customer uses his credit card at your business, there are really three sources of fees being collected:

  1. Interchange. This is where most of the expense of a credit card transaction comes from. It’s a complicated system of fees, rates, and guidelines. The stakeholders of Visa and MasterCard (the large card-issuing banks) essentially set the amount an acquiring (merchant) bank has to pay them when a charge occurs. These rates are the same for everyone, no matter who processes the transaction, so you might think of them as wholesale credit card processing rates.
  2. Assessments. This is Visa, MasterCard, and Discover’s cut. Just like interchange, these fees are the same for every credit card processor, so you have no control over how much they cost you as a merchant.
  3. The processor’s mark-up. Here is where you are able to negotiate your pricing model, rates, and fees. Interchange and assessments are the same for every processor, so when you’re comparing price quotes, this is the fee that determines which is the best credit card processor for you.

When searching for the best deal, you want the lowest effective rate and the best pricing model. The effective rate is simply the percentage of total fees you pay per transaction. The best pricing model is called pass-through (or interchange plus), which passes interchange directly to you without the mark-up changing. You’ll only see pass-through price modeling in your quotes from processors at CardFellow — that way, you’re guaranteed to see only the best quotes.

Of course, when choosing a credit card processor, simply looking at the numbers and understanding where they come from is not the same as seeing the whole picture. And in addition to cost, the little things matter, too. When you use an online marketplace like CardFellow or search for a merchant account on your own, it’s important to consider service and processing options in relation to the needs of your business.

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