The use of cash and checks is declining in favour of electronic payments (credit card, debit, bank to bank transfers, etc). In the US alone, cash use is expected to drop by approximately $200B over the next five years.
The growth of electronic payments makes it important to understand how credit card processing works. The value chain of credit card processing can seem like a complex topics but it can be made simple. The members of the credit card payments value chain include acquirers, issuers, associations, ISOs, merchants, and cardholders.
Role of an Acquirer: the acquirer (Chase, First Data, etc) solicits, underwrites and owns the merchant account. They provide technology and hardware, which enables the merchant to process the transaction.
Role of the Issuer: The issuer is the bank (Capital One, CIBC, RBC, etc) that provides the cardholder with their credit card. They bare the responsibility of approving the cardholder and billing and collecting the owed funds from cardholder.
Credit Card Associations: Associations (Visa, MaterCard, AMEX, et) are commonly referred to as the credit card and debit card companies. The role of the associations is to govern the policies pertaining to their bank cards, monitor processing activity, and oversee the clearing and settlement of transactions. Currently VISA is the most popular association with approximately 65% transaction volume.
ISOs (Independent Sales Organizations): ISOs (Payfirma, Square, etc) are organizations that partner with acquirers to open merchant accounts, handle support, manage payment processing, and build added-value technology on behalf of acquirers. ISOs do this in exchange for a percentage of the transaction volume.
Merchant: The merchant is a business owner who submits a request to an ISO/acquirer for the ability to accept credit. Merchants are approved under the qualifications set by the associations and the policy of the underwriters.
Cardholder: Cardholders (consumers) are customers of a bank that request a credit card. The cardholder will be approved by the issuer based on credit worthiness.
In practice, merchants do not need to work directly with all the members of the credit card processing value chain, just ISOs/acquirers and cardholders. The general process for a merchant to apply and start accepting credit cards is the following:
- In order for a business to begin accepting VISA, MC or debit, merchants first apply for a merchant account with an ISO/acquirer.
- Depending on their sales volumes, a merchant will be quoted rates.
- The merchant chooses the desired processing methods, for example: terminals, wireless, e-commerce, mobile payments, etc.
- Once an agreement has been made on the rates, the application can be submitted for processing.
- Generally accounts are approved in 1 to 5 business days.
- Once an account has been approved, equipment or login credentials are sent to merchant.
- Merchants then can begin accepting credit cards.
- Funds will be deposited into merchant¹s bank account, typically within 24-48 hrs.
- At the end of each month, the processing fees are automatically withdrawn from merchants bank account and a statement is mailed/emailed.
Now, the payment industry is definitely not the simplest industry, but it is gradually becoming more efficient and simple.