Processing of cards may be confusing and overwhelming. To enjoy a positive experience, it is important for individuals to understand some basics. They must understand what they are being charged for and the different options that are available.
Here are six parties involved in a transaction.
- Merchant: He is the business owner that accepts the payment
- Cardholder: The individual who uses the credit card to make purchases
- Card association: Governing bodies that set the interchange rate, maintain and improve networks, and arbitrate between issuing and acquiring banks
- Acquiring bank: Is the merchant’s bank that holds the funds and acquires the money through sales
- Issuing bank: Issue credit cards to customers and pay the acquiring bank for customer purchases
- Payment processor: Handles batching and processing of the purchases made through cards
Credit card process
- The customer makes a purchase using the card
- The card is swiped through a processing terminal that recognizes the same and intimates the card issuing company
- Card authorization
- Card company remits the payment to acquiring bank through certified providers
- Acquiring bank deposits funds into the merchant’s bank
- Monthly statements detailing the interchange fees
The issuing bank lends the money to the cardholders who may pay it after the credit period or carry it forward by paying the finance charges. Both the issuing and acquiring banks deduct fees. Therefore, the amount received by the merchants is lesser than what is charged to the customers.
- Interchange fee: Issuing bank fees
- Discount fee: Acquiring bank fees, this may be supplemented with other charges
Both these fees are a certain percentage of the transaction. However, a small fixed amount may also be applicable for every transaction. Several banks issue cards to individuals and are issuing banks.
Interchange rates are published and may be found online. The interchange fee depends on several factors such as the type of card used, kind of merchant that accepts the payment, and if the card is available during the transaction.
The type of business accepting card payment affects the interchange fees. This to compensate the issuing bank in case of any charge-back. It occurs when customers successfully dispute a charge. In case a customer complains about the product or service, there is a possibility that the merchant’s bank account may be debited with the money paid by the acquiring bank along with an additional fee. Although merchants may dispute this, resolving the issue is time-consuming.
The acquiring bank’s responsibilities are often split between two entities. The merchant service provider stays in constant touch with the merchants. The other company, also known as the processing company does the execution of the transaction. It transmits the relevant information to the merchant, the issuing, and the acquiring bank.
Despite the potential risk, the acquiring bank remits the money to the merchant a few days after the transaction. This is perceived as a loan and therefore, the capability of the merchant to borrow these funds is evaluated. The credit score and ability to borrow is important.