This article will give a sense of the players involved in keeping this system running smoothly, and shed some light on what credit card processing fees actually pay for.
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 cardholders 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. They do that 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 businesses must follow when accepting credit card payments, many of which are designed to prevent businesses from discouraging credit card use. They also keep up on current laws (and in some cases lobby for or against laws) relating to cards. For example, Visa and Mastercard prohibit businesses from setting more than a $10 minimum for credit card purchases in order to maximize the use of their cards. However, the $10 mark itself is set by the Federal Reserve. $10 is the maximum threshold a business can set for using a card.
- Manage chargebacks and facilitate dispute resolution between businesses and 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 business' 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 business' acquiring bank deposits money into the business' 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.
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 business 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 brand's network)
- Receives either the authorization or decline from the issuing bank and transmits it back to the business
- Sends authorizations to the business' acquiring bank for settlement (again, over the network maintained by the card brand)
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.
Aggregators
Companies such as PayPal and Square serve thousands of businesses 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 business 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 actual business, minus any fees the aggregator charges (on top of any interchange and processor fees).
Integrated Software Vendors
In payment processing, integrated software vendors (ISVs) are companies that primarily make software for a particular purpose (such as restaurant order entry systems or other point of sale software, accounting software, etc.) and partner with a payment processor or processors to integrate payment acceptance into their software. In some cases, a software developer will only work with one payment processor, meaning that if you want to use that software and take payments, you'll be required to work with the payment processor the developer partners with. This can lead to expensive processing, as you'll be at the mercy of the rates and terms of the integrated processor. In situations where the software developer supports many processors, you'll be able to choose the processor that best meets your needs while still using the software. 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.
Ben Dwyer
Ben Dwyer began his career in the processing industry in 2003 on the sales floor for a Connecticut‐based processor. As he learned more about the inner‐workings of the industry, rampant unethical practices, and lack of assistance available to businesses, he cut ties with his employer and started a blog where he could post accurate information about credit card processing. As the blog gained in popularity, Ben began directly assisting merchants in their search for a processor. Ben believes in empowering businesses by providing access to fair, competitive pricing, accurate information, and continued support. His dedication to transparency and education has made CardFellow a staunch small business advocate in the credit card processing industry.
