Card
Associations
These are organizations such as
VISA and MasterCard that, along
with the government, make the
rules in regard to acceptance
of credit cards. These rules include
fees that are charged for interchange.
American Express and Discover
are different cases. They are
both the issuer and acceptors,
and Merchants must have a separate
agreement with them. This may
change as current litigation is
resolved. |
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Interchange
Fees
This is the fee that the Card
Association charges the Merchant
to get the funds into his bank
(Merchant Bank) and to get the
billing information to the Cardholder's
Bank (Issuing Bank). Interchange
fees are based on following credit
card regulations and capturing
appropriate data including card
swipe, address, and electronic
signature as needed. These fees
are also based on the timeliness
of the settlement of transactions.
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Issuing
Bank
This is the bank from which the
cardholder receives his card.
These banks promote the use of
the various branded cards and
charge the cardholders interest
and fees for their use. They share
in the Interchange Fee charged
by the Card Associations. Most
of the power in the credit card
industry is seated with the Issuing
Banks. An Issuing Banks worth
is its portfolio of cardholders. |
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Merchant
(Acquiring) Banks
This is the bank that stands in
for all the Issuing Banks and
puts up the funds to be deposited
in the Merchant's account prior
to it being transferred via interchange
from the various Issuing Banks.
Merchant Banks provide these funds
for a Discount Rate, a fee charged
for the use of the money. It's
called a Discount Rate because
it is usually taken away from
credit card funds as they are
deposited. They also share in
the Interchange Fee charged by
the Card Associations. A Merchant
Bank’s worth is its portfolio
of Merchants. |
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Network
Processor (Vendor)
A Processor is a company (often
a third party) that handles credit
card transactions for Merchant
Banks. They are usually broken
down into two types, front-end
and back-end, with a gray area
in between. Front-End Processors
have connections to various Card
Associations and supply authorization
and settlement services to the
Merchant Banks' Merchants. Back-End
Processors accept settlements
from Front-End Processors and,
via The Federal Reserve Bank (FED),
move the money from the Issuing
Bank to the Merchant Bank. In
some cases, the Merchant Bank
gets the settlement information
from Front-End Processors and
in other cases, from the Back-End
Processors. |
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Merchant
Services Provider
A Merchant Services Provider (MSP)
is an organization that quotes
a Discount Rate to the Merchant
and handles the setup with the
Front-End and Back-End Processors
to ensure the Merchant's funds
are correctly routed to his bank.
An MSP can be a Merchant Bank
or an independent sales organization
for a Merchant Bank, called an
ISO.
In either case,
the MSP is responsible for getting
all the paperwork together to
setup the Merchant to accept the
various cards and to allow the
Merchant to process the cards
with the Processor. In some rare
cases, some Merchant Banks are
agents for American Express and/or
Discover, and can set up the Merchant
to accept their cards. In every
case, the MSP is responsible for
setting up the Merchant with the
Processor to accept all card types.
Non-Merchant Bank
MSPs are usually paid a percentage
of the Discount Rate. An MSP is
basically responsible for the
relationship between the Merchant,
Card Associations, Processors
and Merchant Bank.
Compliance
The Card Associations
make regulations for each industry
that accepts credit cards. These
regulations are designed (according
to the Card Associations) to prevent
fraud. |
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Discount
Rate
This is the fee paid by a Merchant
to the Merchant Bank to handle
the deposit of credit card funds
into their bank. It is usually
quoted as a percentage to hundreds
(or basis point). |
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Authorization
The authorization process is different
for each Merchant type. Different
information must be sent depending
on whether you are a restaurant,
retail establishment, hotel or
mail order/telephone order (MoTo)
merchant. In the case of MoTo,
since the transaction does not
take place face-to-face, address
information is required to guard
against fraud. |
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Address
Verification System
Address Verification System (AVS)
is a method whereby the Merchant
is asked to supply address information
for the cardholder in all non
face-to-face transactions. The
Merchants system sends the street
address and the zip code of the
cardholder's billing address to
the Front-End Processor. The Front-End
Processor makes a request of the
Issuing Bank to verify the validity
of the address and lets the Merchant's
system know whether the address
supplied is valid. |
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Settlement
Settlement is the process by which
already authorized transactions
are sent to the Front-End Processor
to be forwarded to the Merchant
Bank and/or Back-End Processor.
They in turn are forwarded to
the FED to move the funds from
the Issuing Bank to the Merchant
Bank.
Regulations relative
to settlement are different for
each merchant type and card type.
These regulations predominantly
cover what information must be
sent at the time of settlement.
Note: The product
or service must be delivered or
performed before settlement can
take place. In the case of MOTO,
this specifically means the goods
must be shipped before the settlement
process is performed. |
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Chargeback
A customer who does not receive
his goods or services, or says
he did not place an order, can
ask his Issuing Bank to charge
back the Merchant. The Issuing
Bank sends the charge back request
to the Merchant Bank, which forwards
it to the Merchant asking to validate
the charge. Information such as
the amount, an invoice or folio,
customer signature or shipping
documents, as well as the shipping
address (used in AVS during the
authorization), is needed to defend
against a charge back. |
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