On a daily basis, how often do you use a credit card? What about a chipped debit card? Have you ever wondered what your card goes through to pay for a transaction?
Let’s shed some light on the industry, starting with the basics.
Credit card transactions begin with authorization followed by settlement. During each stage, different fees are incurred. Each step has the potential to go awry, sticking either the consumer or merchant with high fees or loss of sales. Cardholders, merchants, acquiring banks, issuing banks, and card associations are all playing their roles in credit card transactions. We’ll break it down step-by-step.
First, the cardholder. If you have plastic in your wallet, you are a cardholder. Basically this means that you are the owner of a credit or debit card from a card issuing bank. In place of cash, the cardholder presents this form of currency to make a purchase.
Second, the merchant. The merchant is a business that either provides a service or sells goods. Since cash is no longer king, plastic is accepted as readily in most retail locations and service providers.
Third, the acquiring bank. In a nutshell, the acquiring bank is known as the “merchant’s bank” because they join forces to create merchant accounts. These merchant accounts allow the merchants to accept credit/debit cards. These banks must be registered members of the major card associations, such as Mastercard or Visa. The acquiring bank is responsible for depositing the funds from credit/debit sales in the business’ account. An important note for acquiring banks – often times, a third-party ISO or MSP is contracted out by these banks to oversee the daily functions and activities of the merchant accounts. Merchants will often go directly to their designated ISO or MSP instead of their bank when they need assistance, as these third parties are much more customer-service oriented than the banks.
Fourth, the issuing bank. You may be familiar with this term, because this is the bank that issued your credit or debit card. When you make a payment, the issuing bank pays the acquiring banks. Depending on the type of card you’re using, your funds directly reflect the transaction (debit) or you agree to repay at a later date (credit).
Lastly, the card associations. Visa and Mastercard themselves do not issue credit cards, they do not function as banks, and they have nothing to do with the creation of merchant accounts. Sound confusing? Let’s break it down – Visa and Mastercard act as guardians for their brands. While acting as guardians for their brands, they also govern ISO’s, MSP, and financial institutions. These entities all work together to sustain credit card processing. Another responsibility for card associations? Overseeing interchange fees and qualification guidelines (we’ll get into interchange fees another time). The associations must also act as arbitration between acquiring and issuing banks, promote the card network as well as their own brand. And yes, you guessed it; they’re in it to make a profit as well.