The bankcard industry is made up of thousands of organizations, institutions and companies. The rolls vary tremendously. It is important to understand the rolls of the main entities involved. Here is a brief description of the main entities that are involved in the bankcard industry.
The BankCard Associations:
There are many types of organizations that make up the electronic payment transaction industry. The most significant organizations in this trillion-dollar industry are the bankcard associations. Visa and MasterCard are bankcard associations made up of thousands of “members.” These members are financial institutions (member banks). The primary duties of the bankcard associations are as such:
Other cards such as Discover, American Express, Diners Club and JCB are also common in the merchant service industry. They are structured differently from Visa and MasterCard primarily in the fact that they do not have any members (member banks). They are self-contained companies that control all issuing, acquiring, payment and disputes. Market share is also dramatically less for these “non- bankcards.”
Member banks are financial institutions that have entered into membership with Visa and/or MasterCard. Upon becoming a member, the bank will disclose its intentions – either to issue bankcards to consumers, acquire transactions from merchants, or both. Members can perform these activities themselves, but can also utilize other companies to perform these services and also perform these services for other companies. Gotmerchant.com utilizes member banks to provide Visa and MasterCard acquiring services to its merchants.
The term acquiring in the bankcard industry originated from a member bank acquiring (collecting) merchant sales drafts and subsequently crediting the merchant for these sales drafts. In modern times, paper sales drafts have been replaced by electronic transactions through a merchant account. Sales drafts are however still used in order to prevent fraud or solve disputes in card-present transactions. The acquirer is contracted with merchants to accept merchant sales drafts, provide authorization terminals, instructions, and support, and handle the processing of credit card transactions. In short, the acquirer establishes and manages the merchant's merchant account. The key responsibilities of the acquirer are:
The acquirer is licensed by Visa and MasterCard and agrees to follow the association rules and regulations (called compliance). Some financial institutions are both issuers and acquirers (JP Morgan Chase Bank for instance). Visa and MasterCard both require that the merchant is financially responsible and of good reputation. The merchant has a written agreement with the acquirer to accept the bankcards as payment and to abide by the terms of the agreement.
The issuer is responsible for the cardholder account program, which encompasses nearly all aspects of cardholder account activities ranging from soliciting new customers to billing current ones. The issuer's responsibilities include:
Smaller banks can issue cards without becoming an issuing member by being an agent. The issuer usually keeps most of the income from the cardholder account: the agent receives a small compensation for providing the application. This allows small banks to retain customers who want a credit card program.
Third Party Processors:
Third-party Processors are companies contracted by a member bank to authorize, capture, settle and clear transactions. With the increasing costs of technology associated with electronic payments many members do not have the resources to create their own network. Processors were born out of this necessity for high capacity telecommunication and data storage brought on by electronic payments. They are not members of any card association. Third-party Processor services include:
An agent bank, by agreement, participates in another bank's bankcard program. Usually by turning over its cardholder and/or merchant applications for bankcards to the bank administering the bankcard program and by acting as a depository for merchants.
An ISO or Independent Sales Organization, is a firm or organization that is registered with Visa USA to provide merchants with the ability to accept credit cards. An ISO needs to be sponsored by an acquiring bank (member bank), and pays annual registration fees to Visa & MasterCard. The MasterCard equivalent of Visa's ISO is the MSP or Member Service Provider.
MasterCard and Visa each own and operate their own international processing system. These giant networks connect thousands of member banks around the world. Member banks use these networks to transmit information about bankcard transactions. Visa and MasterCard are at the center of the transaction process – all transactions flow through the Visa and MasterCard data processing networks – facilitating the flow of funds between issuers and acquirers. Components of these data transport networks are as follows:
The term used for the flow of information and funds through the Visa and MasterCard data transport networks to facilitate authorization, clearing and settlement is called interchange. Other information that is passed through interchange includes chargebacks, retrieval requests and representments.
Interchange makes it possible for the issuing banks and acquiring banks to exchange information, transactions and money in a standard format. During this exchange the issuing bank deducts fees from the amount of the transaction. The “net” amount (after fees are deducted) is then paid to the acquirer. These deductions are called interchange fees.
This information has been provided by USMS.
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