What is a Merchant Account?
A merchant account is a commercial bank account established to handle credit card transactions. When a credit card is processed, the money is deposited in the merchant account first and then routed to a business account at the merchant’s local bank. Sometimes the merchant account provider will hold the funds from credit card transactions for a certain period to make sure that the purchases are not fraudulent. Merchant account providers will hold funds up to a month to allow purchasers time to get and read their credit card statements as a way of making sure there are no disputes.
In order to accept credit cards online or offline, a merchant account needs to be setup first. There are two main providers of merchant accounts: commercial banks and merchant account providers. Each has advantages and disadvantages.
What is a Payment Processor?
A payment processor is a financial institution that processes data from credit card transactions. Like a clearing house, a payment processor makes sure that transactions clear. It also performs pre-authorization, post-authorization, and refund services for merchants accepting credit cards.
What is a credit card processor?
Credit card processors are intermediaries with issuing banks and merchant banks. They verify credit card information and then communicate the results to the issuing bank. Credit card processors or clearinghouses receive the credit card information and verify the credit card number and expiration date. Antifraud checks are also completed to make sure the credit card number is valid and that the card is not stolen. A check is also done to make sure that there is sufficient funds are available. After everything is verified, the credit card processor places the charge on the customer’s credit card and deposits the funds in the merchant’s merchant account. Transaction clearinghouses include First Data Corp. and First USA.
What is a Merchant Credit Card Broker or Independent Sales Organization?
An independent sales organization (ISO) is just a fancy way of saying introducing broker. Merchant account brokers get a finder’s fee from banks for referring merchants to them. They also make their money by charging setup fees, selling processing software and equipment, and leasing credit card terminals. Many independent sales organizations do not handle customer service or take on risk if the merchant can’t cover chargebacks. However, according to MasterCard, ISOs are taking on more risk which means more compensation from the acquiring bank. ISOs are being given more responsibility by acquiring banks. This allows acquiring banks to focus on obtaining and retaining large customers. According to MasterCard there are about 2000 ISOs and they employ around 10,000 workers. With a worldwide trend of starting and running businesses on the internet, the need for online merchant accounts for small businesses is only going to increase. This is also increasing the need for independent sales organizations.
What is an issuing bank?
The issuing bank is the financial institution where the consumer has established a credit card account. The issuing bank issues credit to its card holders.
What is an acquiring bank?
The acquiring bank is the bank that receives all the credit card transactions from a merchant and allows the funds to be transferred into the merchant’s normal bank account. The acquiring bank also forwards the credit card transaction to a credit card association like Visa and they in turn forward it to the issuing bank. An example of this chain of events follows:
1. Bob uses his Chase MasterCard to buy an mp3 player for $100 from a Joe’s web store.
2. The acquiring bank receives the purchase information and verifies the credit card data.
3. The transaction data is then sent to Visa and Visa sends it to the issuing bank.
What is a Chargeback?
A chargeback is when a cardholder disputes a credit card purchase and the merchant has to return the disputed amount unless the merchant can prove the transaction was legit. The merchant can dispute the chargeback by proving the product was delivered and the credit card wasn’t stolen, etc. Chargebacks occur when a transaction is disputed by the issuing bank or by the cardholder. Reason’s for disputes include non-delivery of product by the merchant, product not as described, etc. Merchants usually have to pay a chargeback fee in addition to returning the revenue from the transaction.
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