PAYMENT PROCESSING

The relationship between acquirers and merchants is undergoing rapid change. Increasingly, the bank has little or no direct contact with the merchants it serves. Instead, third party Merchant Service Providers (MSP) or Independent Sales Organizations (ISO) have the primary relationship with the merchant. While MSP's and ISO's cannot serve as merchant acquirers because they are not part of the banking system, they now control, by some estimates, three quarters of the merchant relationships in the United States.

The Participants in Payment Processing

• Issuer: The bank or other institution that issues a credit card or debit card to an individual.
• Merchant: A business that has qualified to accept credit or debit cards as payment.
• Acquirer: An organization licensed as a member of Visa and/or MasterCard that maintains a relationship with an Merchant and receives all bankcard transactions from the Merchant.
• Processor: A third-party organization that provides authorization and/or clearing and settlement services on behalf of Issuers, Aquirers, and Merchants.

Only members of the association can enter into contracts with merchants, although member banks can work with third-party firms to do so. Acquirers perform the following functions:

• Signing up merchants and managing the relationship
• Installing terminal equipment
• Providing authorization services when customers present their cards
• Keeping track of transactions and reporting the data to Merchants
• Transferring funds to the merchant on a daily basis to cover card purchases, i.e. clearing and settlement
• Responding to merchant problems with card processing

Some acquiring banks conduct all aspects of merchant acquiring, from signing up the merchant to transaction processing and customer service. Other banks serve as the customer's point of contact but outsource the processing functions to third parties. Still others serve only as the depository institution where clearing and settlement occurs, leaving the third party as the active member of the merchant relationship.

The Steps of Payment Processing

• Acceptance  The credit cards and/or debit cards that a Merchant can have processed vary according to the specific services their Acquirer and Processor provide.
• Authorization  The Merchant contacts the Processor for authorization electronically. The Processor's data center contacts the card's Issuer and retrieves the Cardholder's account information. If the card is valid and the Cardholder has sufficient credit, the Processor authorizes the transaction and returns a numerical approval code to the Acceptor. If the card is not valid or the Cardholder is over his credit limit, the Processor declines the sale.
• Purchase   After receiving authorization, the Acceptor records the sale.
• Submission & Deposit   On a daily basis, the Acceptor submits batches of card transactions to the Acquirer, in electronic form. The Acquirer essentially buys the Acceptor's card transactions and credits their value to the Acceptor's account, minus a processing fee, which is called the “discount rate.
• Settlement   In turn, the Acquirer collects payment for transactions from the Issuers of each of the individual Cardholders. This settlement is carried out through a network of Processors called "interchange." The Acquirer pays each Issuer an interchange fee. The Issuers then bill their Cardholders for the amount of their charges with an itemized monthly statement.
• Chargebacks   A transaction that is challenged by a Cardholder or Issuer and is sent back through interchange to the Acquirer for resolution is called a “chargeback”.