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The Different Organizations of Merchant Services

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Recent History:

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:
  1. Create advertising and promotion programs to support their brands.
  2. Develop new products.
  3. Conduct clearing and settlement processing of transactions (interchange).
  4. Set and enforce rules and regulations governing their bankcards, such as operational procedures, interchange procedures, and oversee the marketing methods by other entities of their brands.
They do not:
  1. Issue credit cards.
  2. Create policies for solicitation of new cardholders or merchants.
  3. Establish criteria for evaluating applicants.
  4. Set credit limits offered to cardholders.
  5. Determine procedures for billing customers.
To become a member of one of the bankcard associations, an organization must be a financial institution. The member bank is then licensed to issue bankcards and/or acquire transactions to its customers. These banks are also required to provide cash advances on bankcards at their teller windows. As a member, banks are issued a Bank Identification Number (BIN) and pay membership dues and assessments to fund the bankcard associations.

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:

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.

Acquiring:

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:
  1. Setting up new merchants with merchant accounts.
  2. Investigation procedures on disputed transactions.
  3. Pricing of discount rates and fees to the merchant.
  4. Establishing merchant acceptance guidelines.
  5. Support services for merchants (customer service, voice authorizations, etc).
  6. Risk Management and fraud detection/prevention.
The acquirer charges the merchants certain fees, including a discount rate (a percentage that is deducted of every transaction) for handling the transactions. In actuality, the majority of this discount rate goes to the issuing bank of the credit card, the acquirer only keeps a small fraction of this amount.

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.

Issuer:

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:
  1. Acquisition and marketing of new merchant accounts.
  2. Processing application; establishing credit limits and policies.
  3. Overseeing design, manufacturing, and embossing of inventory cards.
  4. Handling of issuing and reissuing of cards.
  5. Overseeing PIN numbers.
  6. Maintaining authorization files.
  7. Providing customer service.
  8. Processing payments and handling settlement through interchange.
  9. Establishing collections operations.
Managing a credit card program is expensive. That is one of the reasons why the issuing banks receive most of the discount rates charged by acquirers.

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:
  1. Authorization – The process by which a transaction is approved by the issuer or by MasterCard or Visa on behalf of the issuer.
  2. Capture – An action in which an electronic credit card sale transaction is submitted for financial settlement. Authorized credit card sales must be captured and settled in order for a Merchant to receive credit for their sales and a cardholder's account to be debited/credited.
  3. Settlement – The process by which acquirers and issuers exchange financial data (clearing) and monetary value (settlement) resulting from sales transactions, cash advances, merchandise credits, etc.
  4. Other Services - Some Processors perform many “back office” or service functions for the acquirers. These can include; help desk (24-hour customer service), chargeback and retrieval request processing, the issuing of statements, risk management and credit underwriting.
Examples of processors: Global Payment Systems (MAPP, NDC), First Data Resources (FDR), Electronic Data Systems (EDS), Concord EFS and Vital.

Agent Bank:

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.

ISO/MSP:

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.

Interchange:

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:
  1. MasterCard's data processing network is called Banknet.
  2. Banknet handles MasterCard's authorization system.
  3. The Banknet clearing and settlement system is INET.
  4. Visa's data transport network is called VisaNet.
  5. The VisaNet authorization system is Base I.
  6. The VisaNet clearing and settlement system is Base II.
On these networks, transactions are authorized, cleared and settled. Clearing refers to the exchange of financial information. Settlement refers to the exchange of the actual funds for the transaction and the associated fees. Clearing and settlement occur simultaneously.

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.


Credit Card Processing Articles
  1. Why Should you Accept Credit Cards?
  2. The Different Types of Merchant Accounts
  3. How to Avoid Credit Card Processing Downgrades
  4. Merchant Account Responsibilities
  5. The Different Types of Credit Card Machines
  6. What is a Merchant Account?
  7. Why Avoid Credit Card Terminal Leases?
  8. 3 Ways to Save Money on Credit Card Processing
  9. Credit Card Processing Checklist
  10. Pros & Cons of Credit Card Processing
  11. What to Expect in Your Monthly Statement
  12. The History of Credit Card Processing
  13. Recent History & Future of Credit Card Processing
  14. The Different Organizations of Merchant Services
  15. The Glory Details of Disputes, Retrievals & Chargebacks
  16. Understand All the Risk with Merchant Services
  17. Factors & Guidelines to Merchant Service Underwriting
  18. The Life Cycle of a Credit Card Transaction



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