To understand credit card processing, it is important to first understand who the major participants are in the industry and the roles they play.
Most people see credit card transactions as an item is desired, the cardholder pays with a card, the merchant accepts the card, papers are signed, the cardholder leaves with the item and 25 days later the cardholder receives a bill for the item.
However, there are a number of activities that occur behind the scenes. Like a great movie where we only see a fraction of the hard work that goes into the final product, much of what goes in transaction processing is performed away from the point of sale.
To better understand transaction processing, it is important to first understand who the major participants are within the industry. Transactions involve some or all of the following participants:
- Acquirer processor
- Card associations
- Issuer processor
CARDHOLDER – A cardholder is the individual who uses a credit or debit card to purchase services or goods.
MERCHANT – The merchant is a business that accepts the credit or debit card as a form of payment for services or goods.
ACQUIRER – Acquirers are banking institutions or non-banking financial institutions who provide the merchant the means and
the support to process payment card transactions. The acquirer often supplies the merchant with a point of sale device that enables the merchant to accept and process transactions and provides the merchant access to the card association networks and deposits the funds into the merchant’s bank account. A credit card or debit card acquirer must be a bank since only banks may be a member of the card associations and have access to the card association networks.
The acquirer has a direct relationship with the merchant and is the first point of contact for the merchant.
The acquirer screens merchants in accordance with their risk underwriting policy and, if accepted:
• Provides the merchant with a point of sale terminal if needed, instructions and support services.
• Accepts and processes payment card transactions initiated by the merchant.
• Settles the transactions and deposits the funds into the merchant’s bank account.
• Charges the merchant in the form of a “discount rate” and/or processing fee for these services.
ACQUIRER PROCESSOR – Some acquirers utilize the services of a third party processor to perform the processing activities
required of an acquirer. Since an acquirer processor is not a banking institution and, therefore, may not be a member of a card
association, the acquirer is in effect subcontracting the acquirer processor to perform the required processing function. An acquirer may contract with an acquirer processor for any number of reasons, including cost or the fact that processing is inconsistent with the acquirer’s core business of lending money.
CARD ASSOCIATIONS – Card associations function as governing bodies for acquirers and issuers engaged in processing
credit and debit cards. Card associations develop and promote card brands, establish and enforce operating rules and regulations, and operate and maintain the authorization and settlement systems including settlement and transfer of funds between the issuers and acquirers. Card associations do not issue cards to cardholders, set credit limits, card fees or interest rates, solicit merchants or establish merchant discount rates.
ISSUER – Issuers are generally financial institutions who are responsible for issuing payment cards to cardholders. As such, issuers:
• Approve or decline cardholder applications
• Establish credit limits
• Establish and impose finance charges
• Issue cards
• Bill and collect payments from the cardholder
• Produce monthly cardholder statements
• Provide customer service
• Process chargebacks
• Respond to all cardholder transaction approval requests received from the card associations
• Receive and transfer funds for all transactions settled through the card associations
Issuers are subject to federal regulation and therefore governed by a number of rules and regulations regarding the issuance of
consumer credit. Card associations are responsible for insuring their rules and regulations comply with federal and state laws
regarding consumer credit. An issuer is a licensed member of the card associations.
The issuer has a direct relationship with the card holder. A card holder has contact only with the issuer of the card.
ISSUER PROCESSOR – Just as some acquirers utilize the services of an acquirer processor, for many of the same reasons
some issuers utilize the services of a third party processor to perform the processing activities required of an issuer.
ISO – In Independent Sales Organization (“ISO”) is a sales and marketing company that solicits merchant relationships on behalf
of an acquirer. The ISO is separate and distinct from the acquirer and performs the merchant solicitation function pursuant to an
agreement with the acquirer. In some cases the acquirer does not engage in any merchant solicitation activities directly and relies
completely on ISO’s to perform these activities while in other cases the acquirer utilizes the services of ISO’s in addition to
maintaining its own sales organizations.
The same company can act as both an ISO and an acquirer processor.