I have been working in the payments industry for a long time. Back,
when I first started you had to convince merchants to accept cards. It was
a different time. Now, when you find a person or business owner that
does not accept cards, you feel shocked. As an experiment, let’s see if I can
make since of our industry.
Let’s start by looking behind the curtain to see how it all works. if you are
just taking your business online in in eCommerce and online payments.
You will need to at minimum have a basic understanding of the payments
industry to survive and thrive.
In this post I will explain the main frames relationship to main street
and then take you across the seas to the world that awaits.
Checkout what’s available for free in eCommerce online business.
1. Your business (Merchants)
the payments professionals call business owners merchants. The merchants bring goods and services to the main street market. Sometimes the market is in a business district and sometimes the services are sold online.
A merchant banker assigns the business owner or merchant to an acquiring bank. The merchant applies for and receives a account to process payments. The payments are deposited into a local regional bank chosen by the merchant.
A lot of people start to get confused because of the differing types of banks in the banking system. In the card service industry the are two types of banks. One type of bank is the Acquiring bank. The acquiring bank processes the transactions and deposits the proceeds into a merchant account at a local bank. Furthermore, a second type of bank in the cardsevice industry is the Issuing Bank. This is a type of bank that issues credit cards to consumers through member banking institutions such as your local main street bank. Both banks are members of card networks, such as Visa or Mastercard.
Businesses Merchant Account
A business merchant account is issued by the Acquiring bank. It allows the cards to get accepted by the local merchant.
The Payment process flow is the following
1.The customer swipes the card at a POS (point of sale) terminal
2. Information is submitted to an acquiring bank
3. the transaction is then submitted to a the card holder’s issuing bank.
4. the issuing bank will then decline or approve the transaction.
5. If approved in 24-72hrs the money is deposited into the businesses account.
Merchant accounts are identified by account numbers issued by acquiring
banks. It identifies the owner of the transactional information used to
process the transaction and make deposits into the business owners
account. The owner receives the funds as a result of having agreed to
follow the rules set by the Issuing banks (card associations).
Merchant banks charge fees for the process. These fees are debited
monthly, or daily. The fees are charged as a percentage of each
2. The Customer
There are generally 2 types of customers. A customer that shows up in
person or a customer that orders online or by phone. A customer that
presents a card in person costs the merchant less than a customer who is
not present. Customers that buy online and by phone are considered
higher risk transactions. Therefore, the fees charged to process these
transactions cost higher fees.
3. Payment processing companies
Payment processors come in many shapes and sizes. But they all do the
same thing. Some do better than others. The only time this is important is
when the anomaly of a bad transaction occurs. The payment processor
works with the gateway to process transactions. Once the customer
interacts with the POS system at the store owners location the
information is submitted to a payment gateway through the payment
4. Your local bank and settlement
Let’s call your local bank your issuing bank. It issues credit cards, and
bank cards as a franchise of the card associations. The card associations
run the card networks that communicate between bank associations.
The issuing bank will receive a request for authorization and will either
accept or decline the transaction. Depending on the health of the account
of the card holder.
How Does a Card Authorization Work?
More on authorization. When a card interacts with a POS Terminal an
authorization occurs. A authorization is a request for acceptance of a
charge being generated by the card holder.
How Does Credit Card Interchange Work?
Interchange is the movement of data such as records that need to be
cleared and processed. the term includes the fees and costs associated
with the movement of this data. Think of these networks as a series of
road ways with tolls. depending on the type of transaction, different tolls
are generates by the interchange network. Banks charge fees for the
movement of these transactions to settlement. Card based fees are paid by
the aquiring bank or the business’s local bank, and on to the customers
banks and issuing bank.
Transactions are submitted to the acquiring banks for a small fee. The
payment processor receives this batch at the end of everyday. If not all
transactions get charged as not present transactions and are charged the
higher card not present fee. The transactions are then settled at all the
According to Mastercard, “interchange fees are neither hidden nor a tax,
and are not paid by consumers. An interchange fee is a small fee paid by a
merchant’s acquiring bank to a cardholder’s issuing bank as part of an
electronic payment card transaction. Interchange facilitates the global
electronic payments system and serves as a critical tool to balance the
benefits and costs of that system among its participants”.
As members of the card networks, Acquirers, uphold the sanctity and
regulation of the payment networks. The companion relationships
guarantee the smooth settlement the trillions of transactions needed to
drive the global economy as well as the main street local economy.
So there it is the story of the Payment processing and how it works.