Merchant Accounts 101
Everything You Need to Know to About Merchant Accounts
Author: Jim Conners
Rating: 10.0
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The Players
One of the main goals of companies that establish merchant accounts is to simply a complicated process. By simplifying it not only do they make their jobs in selling the service easier, but it also makes it easier for the merchant to understand as well. As with any other business, there are also many layers of participants who make a service happen. Knowing whom all of the players in establishing merchant accounts really isn't necessary to accept credit cards. But knowing who affects your rates and how your account operates allows you to make better informed decisions when establishing an account or working with an existing account.
The Card Companies
Without the credit card companies there would be no credit card to accept. These companies not only issue the credit cards and govern how consumers may use them, but they also govern how the merchants may accept them.
Visa and MasterCard
Visa and MasterCard are separate worldwide payment service organizations composed of member institutions. They set and enforce rules and regulations governing their bankcards, such as operational and Interchange procedures. They create advertising and promotion programs to support their brands and develop new products to serve banks and consumers and are also responsible for conducting clearing and settlement processing of credit card transactions through Interchange. They supervise the bankcard processing function within their members' banks.
Combined Visa and MasterCard account for 83% of all credit card transactions in the United States.
American Express
American Express started off as a travel card and is often classified as a "Travel & Entertainment" card. However, it is a true credit card like Visa and MasterCard and is accepted at most types of business. American Express is the preferred credit card of many businesses and, although American express usage is far less then that of Visa and MasterCard, businesses that deal primarily with other businesses (b2b) or is frequented by business professionals may see American Express as their primary credit card being accepted. Unlike Visa and MasterCard American Express is not comprised of member banks but is its own entity. This means you need to apply directly with American Express or your merchant account provider needs to be an authorized representative to establish the account for you.
American Express accounts for 13% of all credit card transactions in the United States.
Discover Card
Discover Card was started by Sears and is the newest of the four major credit cards. Although Discover Card has more cardholders then American Express, in terms of processing it is by far the smallest of all of the major credit card providers. Like American Express, Discover Card is not comprised of member banks but is its own entity and a merchant account must be established directly through them. Unlike American Express, however, Discover Card is now partnering with processing banks to have merchant accounts established just like Visa and MasterCard.
Discover Card accounts for 4% of all credit card transactions in the United States.
Others
While Visa, MasterCard, American Express, and Discover Card comprise the overwhelming vast majority of credit card transactions in the United States, they aren't the only credit cards some merchant may see in the normal day-to-day of operating their business. Foreign credit cards like the Japanese issued JCB credit card are fairly popular on the west coast in Hawaii. Some restaurants may accept the Diners Club card. Truck stops may accept fleet cards. Since these special cards are so limited in their use and acceptance this article will not cover them.
The Card Issuing Banks
The card issuing bank is the bank that issues the credit card. They are a licensed member of Visa and MasterCard and can also be an Acquirer (see below). The Issuing Bank solicits, screens, and approves the cardholder for a credit limit. Once the cardholder has the card, the Issuing Bank approves or declines sales the cardholder wants to make with the card, bills the cardholder for charges to the card, and collects funds from the cardholder to pay the merchant for purchases.
Acquirers and Processing Banks
The Acquirer provides credit card processing services to the merchant by acting as the communications link between the merchant and the card issuing bank. The Acquirer is a member of Visa and/or MasterCard.
Member Service Provider / Independant Sales Organization
A Member Service Provider (MSP) is a licensed broker of credit card services or banks through which business is processed. A MSP is usually an independent salesperson or company who contracts with a bank or a processor to sell credit card processing, equipment, and services to the merchant. The MSP sometimes provides back office functions such as settlement and chargeback/retrieval management, equipment-related customer service, paper storage and retrieval, and supplies. MasterCard originated the term MSP, while Visa uses the term ISO (Independent Sales Organization).
Sales Agents
Sales agents are individuals who represent a MSP/ISO. They are not members of Visa or MasterCard and are not contracted directly with a bank or processor. As a result they are not allowed to sell merchant accounts under their own business name. They must use the business name of the MSP/ISO with whom they are affiliated.
See our blog post Small Providers Are As Good As Large Providers to see why small providers are just as good as large providers.
The Cardholder
The cardholder uses the credit card given by the card issuing bank to purchase goods and services or to obtain a cash advance and receives a monthly bill from the card issuing bank for every purchase or use of the card. The cardholder is expected to sign the back of the card and limit its use to only authorized users, stay within the assigned credit limit, and pay the card issuing bank all or a minimum amount of the balance when the monthly bill is received.
The Merchant
The merchant provides goods and/or services to the cardholder. Visa and MasterCard require that the merchant be financially responsible and of good repute and adhere to all rules and regulations set forth by them. The acquirer requires that the merchant adhere to the merchant processing agreement they signed that details the prices the merchant will pay for equipment, discount rates and fees. It also spells out the terms and conditions under which the merchant will conduct credit card business, such as the card types the merchant will accept, chargeback rights, and access to the merchant's bank accounts.
Platforms and Networks
Processing Platforms, also known as Processing Networks, are the computer networks that electronic transactions occur over each day. There are multiple networks available for electronic transactions to occur over but the merchant does not choose which platform(s) they use. Each acquiring bank establishes relationships with the processing platforms they feel would be best for their business model (usually basing the decision on cost and availability).
Not all platforms are created equally. Each platform establishes a unique API for which software and equipment can communicate with it. Thus, software and equipment cannot use a platform to process electronic transactions until it has verified that it can support that platform's API successfully. As a result some software and equipment will only work on some platforms and not others.
When choosing a merchant account provider, some merchants will base their decision on the platforms that provider has available to them. This will typically be because the merchant has a specific piece of software or equipment that only works on a specific platform. An example would be restaurants that use proprietary POS software.
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