Whether transacting e-commerce over the internet or serving customers face-to-face at brick-and-mortar stores, merchants today rely on credit card and debit card transactions to facilitate most of the business they do. There are costs associated with being able to accept payment cards, however, and those costs seem onerous to many small business owners.
The payment card industry consists of more entities than just the card associations (such as Visa and MasterCard) and the banks that issue the cards. Unless they’ve dealt with card payments firsthand, many people have no idea just how many middlemen are involved in the transaction chain. The players include:
- Card associations –These are the names that are familiar to merchants and customers alike – Visa, MasterCard, American Express and Discover. Each association establishes the rules for its brand and markets its products to both consumers and businesses.
- Card-issuing banks – These financial institutions are the ones that actually approve and issue Visa and MasterCard credit and debit cards to consumers. (Discover and American Express are card issuers in addition to being card associations.)
- Processors/acquirers – These are the entities that route each card transaction to the appropriate card association network, which in turn route each transaction to the correct card-issuing bank for its authorization. Processors/acquirers also fund merchant bank accounts and issue monthly statements to merchants, as well as providing general and technical customer support services. In practice, three or more companies could be working together to provide this package of services to merchants.
- Merchant account providers – This term applies to the companies that merchants contract with to handle their card processing. A merchant account provider can be a processor/acquirer or it may be a financial institution. Other merchant account providers are independent sales organizations (ISOs) that partner with processors/acquirers.
- Payment gateway – These are special routing systems used by electronic shopping carts. Payment gateways route transactions to processors/acquirers.
Naturally, there are direct fees or indirect costs associated with every step of this process. The card associations and issuing banks set “interchange rates” and “pass-through” fees that every merchant account provider must pay. Merchant account providers in turn will charge their client merchants an authorization fee, a batch header fee and other transaction fees to cover their costs. For transactions driven by a payment gateway, the merchant account provider – or the gateway itself – may charge both a fixed monthly fee and a per-transaction fee. However, many gateways waive the per-transaction fee on the first 250-500 transactions for each account each month.
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