Electronic payments (credit cards, debit, bank to bank transfers, etc.) are quickly displacing cash and checks as the preferred way to pay. Cash use is expected to drop by approximately $200 billion 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 topic, so we broke it down to make it simple for anyone to understand.
The members of the credit card payments value chain include acquirers, issuers, associations, ISOs, merchants, and cardholders:
An 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.
The issuer is the bank (CIBC, RBC, etc.) that provides the cardholder with their credit card. They bear the responsibility of approving the cardholder, billing and collecting the owed funds from cardholder.
Credit Card Associations
Associations (Visa, MasterCard, AMEX, etc.) 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.
Processors (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. Processors do this in exchange for a percentage of the transaction volume.
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.
Cardholders (consumers) are customers of a bank that request a credit card. The cardholder will be approved by the issuer based on creditworthiness. 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 cards, 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 – terminals, mobile, e-commerce, 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 can then begin accepting credit cards.
– Funds will be deposited into merchant’s 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.
These steps are necessary to make sure the merchant is set up correctly and ready to process payments.
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