| mizmiz |
06-05-2009 11:31 AM |
A merchant account is a contract under which an acquiring bank extends a line of credit to a merchant, who wishes to accept payment card transactions of a particular card association brand. Without such a contract, one cannot directly accept payments by any of the major credit card brands. When using an intermediary payment service provider (such as PayPal), the merchant account is in fact held by the service provider itself.
[edit] Methods of processing credit cards
Today a majority of credit card transactions are sent electronically to merchant processing banks for authorization, capture and deposit. Various methods exist for presenting a credit card sale to "the system." In all circumstances either the entire magnetic strip is read by a swipe through a credit card terminal/reader or the credit card information is manually entered into a credit card terminal, a computer or website. The earliest methods, submitting credit card slips to a merchant processing bank by US mail, or by accessing an Automated Response Unit (ARU) by telephone, are still in use today but have long been overshadowed by electronic devices. These early methods used two-part forms and a manual device for mechanically imprinting the embossed card number information onto the forms. Whenever practical it is best to swipe a credit card because the rates will be much lower and the incidence of stolen credit card number fraud is greatly reduced.
[edit] Credit card terminal
A credit card terminal is a stand-alone piece of electronic equipment that allows a merchant to swipe or key-enter a credit card's information as well as additional information required to process a credit card transaction. A credit card terminal is a dedicated piece of equipment that only processes credit cards although it is common for related transactions including gift cards and check verification to also be performed. A credit card terminal typically must be plugged in to a power supply and connected to a telephone line. However, some terminals may be powered by batteries, communicate over the Internet or through the cellular phone networks. When a credit card is processed (either swiped through the magnetic stripe reader or keyed in to the keypad), it contacts the network to verify if the credit card can be authorized. The transaction is then stored on the machine until the polling window is opened. The machine will either upload the electronic funds directly to the merchant bank, or a polling service provider will dial in to collect, process then submit the data to the merchant bank. The most popular credit card terminals consist of a modem, keypad, printer, magnetic stripe reader, power supply and memory card. They have had the same basic design since the 1980s. As with computers, there is a wide range of memory capacities and other features like built-in printers and debit card pinpads that affect the manufacturing cost of a credit card terminal.
[edit] Automated Response Unit (ARU)
An ARU (also known as a voice authorization, capture and deposit) allows the manual keyed entry and subsequent authorization of a credit card over a cellular or land-line telephone. With this method a merchant typically imprints their customer's card with an imprinter to create a customer receipt and merchant copy, then process the transaction instantaneously over the phone.
[edit] Payment gateway
A payment gateway is an e-commerce service that authorizes payments for e-businesses and online retailers. It is the equivalent of a physical POS (point-of-sale) terminal located in most retail outlets. A merchant account provider is typically a separate company from the payment gateway. Some merchant account providers have their own payment gateways but the majority of companies use 3rd party payment gateways. The gateway usually has 2 components: a) the virtual terminal that can allow for a merchant to securely login and key in credit card numbers or b) have the website's shopping-cart connect to the gateway via an API to allow for real time processing from the merchant's website.
[edit] Level 2 or Level 3 Processing - Purchasing Cards
Visa and Mastercard have created a specialized type of credit card used primarily by government agencies and businesses. Increasingly, corporations and government agencies are relying on this form of payment to compensate their service providers and suppliers. Businesses benefit by receiving their funds quickly and by winning competitive bids and government contracts where purchasing cards are the required form of payment. The downside, however, is the increased costs associated with receiving these payments. These costs will usually be much higher than accepting a standard consumer credit card.
The solution is that some businesses may qualify for ways to process these transactions that allow them to pay lower fees if they can supply additional information, called "level 2 or level 3 data". For example, if government transactions are over $5,000, businesses can significantly reduce their transaction costs by including "level 2 or level 3 data" about the purchase along with each transaction. Examples of level 2 or level 3 data is a purchase order number associated with the transaction that the credit card will be paying. This data is passed on to the purchaser so that it may be many times easier to reconcile the transaction. If all the required data is not collected and passed on during the transaction, the merchant can have surcharges added to the basic fees or be forced into a non qualified transaction category.
[edit] Merchant Account Marketing
Merchant accounts are marketed to merchants by two basic methods: either directly by the processor or sponsoring bank, or by an authorized agent for the bank and additionally directly registered with both Visa and MasterCard as an ISO/MSP (Independent Selling Organization / Member Service Provider). Marketing details are by card issuers like Visa and MasterCard, and are enforced by various rules and fines.
[edit] Marketing by Banks
A bank that has a merchant processing relationship with Visa and Mastercard, also known as a member bank, can issue merchant accounts directly to merchants. To reduce risk, some banks limit approval to merchants in its geographical area, those with a physical retail storefront, or those that have been in business for 2 years or more.
[edit] Marketing by Independent Sales Organization (ISO)/MSPs
To market merchant accounts, an ISO/MSP must be sponsored by a member bank. This sponsorship requires that the bank verify the financial stability and suitability of the company that will be marketing on its behalf. The ISO/MSP must also pay a fee to be registered with Visa and Mastercard and must comply with regulations in how they may market merchant accounts and the use of copyrights of Visa and Mastercard. One way to verify if an ISO/MSP is in compliance is to check a website or any other marketing material for a disclosure "company is a registered ISO/MSP of bank, town, state. FDIC insured". This disclosure is required by both Visa and Mastercard and will cause a fine of up to $25,000 if it is not clearly visible. In almost all cases, if there is no disclosure, the company is likely to be an uninformed 4th party or worse. In many cases unregistered operators have been responsible for some of the worst horror stories from merchants.
[edit] Rates and fees
A Merchant Account has a variety of fees, some periodic, others charged on a per-item or percentage basis. Some fees are set by the merchant account provider, but the majority of the per-item and percentage fees are passed through the merchant account provider to the credit card issuing bank according to a schedule of rates called interchange fees, which are set by Visa and Mastercard. Interchange fees vary depending on card type and the circumstances of the transaction. For example, if a transaction is made by swiping a card through a credit card terminal it will be in a different category than if it were keyed in manually.
[edit] Discount Rates
The discount rate comprises a number of dues, fees, assessments, network charges and mark-ups merchants are required to pay for accepting credit and debit cards, the largest of which by far is the Interchange fee. Each bank or ISO/MLS has real costs in addition to the wholesale interchange fees, and creates profit by adding a mark-up to all the fees mentioned above. There are a number of price models banks and ISOs/MLSs use to bill merchants for the services rendered. Here are the more popular price models:
[edit] 3-Tier Pricing
The 3-Tier Pricing is the most popular pricing method and the simplest system for most merchants, although the new 6-Tier Pricing is gaining in popularity. In 3-Tier Pricing, the merchant account provider groups the transactions into 3 groups (tiers) and assigns a rate to each tier based on a criterion established for each tier.
[edit] Qualified rate
A qualified rate is the percentage rate a merchant will be charged whenever they accept a regular consumer credit card and process it in a manner defined as "standard" by their merchant account provider using an approved credit card processing solution. This is usually the lowest rate a merchant will incur when accepting a credit card. The qualified rate is also the rate commonly quoted to a merchant when they inquire about pricing. The qualified rate is created based on the way a merchant will be accepting a majority of their credit cards. For example, for an internet merchant, the internet interchange categories will be defined as Qualified, while for a physical retailer only transactions swiped through or read by their terminal in an ordinary manner will be defined as Qualified.
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