In order to compete in today’s global marketplace, it is essential that businesses large and small accept credit and debit cards from their customers. Credit and debit card usage continues to rise; if you don’t want your customer going to one of your competitors, you must accept plastic.
You need to establish a merchant account. Plenty of providers offer these processing services, but not all of them will share in your company’s vision. In this guide, author Michael Mintz provides advice and information about handling a merchant account. It answers these vital questions:
• How does the credit and debit card process work?• What is interchange, and why do I care about it?• Who makes what on each transaction?• What are the pricing strategies and additional fees?• How do I read my month-end statement?• Why should I worry about PCI compliance? • What does the Durbin Amendment mean to me?• What should I know about American Express?
You’re a Business Owner, Not a Dummy provides an insider’s look at the sometimes complex system of merchant accounts and provides a wealth of information to help you make the right decision for your business.
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You're a Business Owner, NOT A DUMMY!Understand Your Merchant Account
By Michael Mintz
iUniverse, Inc.Copyright © 2012 Michael Mintz
All right reserved.
Chapter OneHow Does the Credit and Debit Card Process Work?
This chapter will discuss
key industry terms;
the different ways merchants accept credit and debit card payments;
who all the players are; and
the step-by-step electronic payment process.
The first step to understanding the world of merchant processing is to become more familiar with the industry lingo.
Key Industry Terms
ABA Routing Number
The American Banking Association (ABA) routing number is a unique, bank-identifying number that directs electronic ACH deposits to the proper bank. The number consists of nine digits and precedes the account number printed at the bottom of a check.
Acquiring Bank or Acquirer
The banking institution that provides its clients with the ability to accept electronic forms of payment. An acquiring bank teams with a processor to set up a merchant account for a client.
Address Verification Service (AVS)
A service that verifies the cardholder's billing address. Utilizing an AVS is applicable to certain types of businesses (mail order, telephone order, or Internet-based) in order to help combat fraud in card-not-present transactions.
When a correction to a transaction is required, this is handled by making an adjustment.
A financial organization that issues credit cards and acquires transactions, unlike Visa and MasterCard, which are bank associations.
A fee charged by some merchant services providers on an annual basis. Annual fees are sometimes referred to as membership fees.
A one-time fee charged by merchant services providers that covers the cost of merchant account underwriting, approval, and setup.
The process by which a transaction is approved by an issuing bank. Approvals are requested via an authorization, which ensures the cardholder has the appropriate credit limit or bank account balance to honor his or her financial obligation.
Assessments are the portion of interchange fees charged by Visa, MasterCard, and Discover. As of October 1, 2011, assessments are 0.11 percent for Visa and MasterCard and 0.10 percent for Discover, calculated on the dollar amount of the transaction.
An authorization is a request made by the merchant to charge a cardholder. The authorization must be settled (see batch settlement) in order to charge the actual credit or debit account. If batch settlement does not occur within a specified time frame, the charge will drop off and not be funded; the customer will not be charged; and the merchant will not be paid.
The numeric or alphanumeric code provided by the issuing bank that references the transaction for internal and external reporting purposes.
The response provided by the issuing bank to the acquiring bank and ultimately to the merchant when an authorization is initiated. Responses include approval, decline, and referral.
Automated Clearing House (ACH)
The automated clearing house network is a nationwide, wholesale electronic payment and collection system. It is a method of transferring funds between banks via the Federal Reserve System.
Automatic Bill Payment
An agreement between a merchant and a cardholder allowing recurring, periodic billing using a credit or debit card for goods or services rendered (for example, when a patient goes to the dentist and promises to pay off his $1,200 bill in twelve equal $100 installments that will occur on the first day of each month for twelve months). This is also called recurring billing.
Average Ticket (Average Transaction Amount)
The average dollar amount of a merchant's credit and debit card transactions calculated by dividing the total dollar volume of monthly transactions by the total number of monthly transactions.
A basis point is equal to one one-hundredth of a percentage point. Discount rates are expressed in basis points.
1 Basis Point = 0.01% and 100 Basis Points = 1.00%
A collection of transactions submitted for settlement. It is good business practice to run a batch once a day.
The process by which a merchant submits all transactions that occur throughout the day to its acquiring bank for settlement and deposit into its business bank account.
The process of capturing funds from an authorization. The acquiring bank captures funds from the issuing bank on behalf of its client (the merchant).
A network of issuing banks and acquiring banks that process payment cards of a specific brand. Familiar payment card association brands include Visa, MasterCard, and Discover.
Card-Not-Present (CNP) Transactions
When the cardholder and the card are not physically present at the time the transaction occurs. Typical card-not-present transactions take place in industries focused on business-to-business, mail order, telephone order, and Internet-based transactions.
When the cardholder and the card are physically present at the time the transaction occurs. Card-present transactions account for the majority of credit and debit card transactions in the world. Also called swiped transactions.
Card Verification Value Code (CVV)
The card verification value code is used to help authenticate a customer's credit or debit card in card-not-present transactions. For Visa (CVV2) and MasterCard (CVC2), the code will be the last three digits printed on the back of the card. For American Express (CID), the code will be the four-digit number on the front of the card above the account number.
The process by which funds that have been paid to a merchant are taken back because of a disputed or improper transaction. A chargeback is typically initiated by the consumer/cardholder. Merchants are often assessed a fee for each chargeback regardless of the ultimate outcome.
Commercial, Corporate, or Business Cards
Credit or charge cards issued by businesses to cover expenses for their employees such as travel and entertainment.
The nullification of a prior authorized and settled transaction where funds are returned to the customer.
A bank card used to purchase goods and services and to obtain cash. When a debit card is used, the cardholder's personal bank account is debited for the amount of the purchase. Certain debit card transactions require a personal identification number (PIN) for use. Debit cards branded with a bank card logo (Visa or MasterCard) can be accepted without a PIN.
A transaction that is not approved by the issuing bank. A decline by an issuing bank means the bank will not authorize the request made by the acquiring bank because of either a lack of funds or lack of credit on the cardholder's account.
A percentage rate-based fee. The discount rate is multiplied by the dollar amount of each transaction to calculate the discount fee owed. Discount rates are applicable to both interchange fees and the fee to the acquirer, processor, ISO, or bank.
Discover Financial Services is a direct banking and payment services company. Discover operates the Discover Network, their credit card payments network; the PULSE network ("PULSE"), their automated teller machine ("ATM"), debit and electronic funds transfer network; andDinersClubInternational,theirglobalpaymentsnetwork. ("2010 Form 10-K, Discover Financial Services". United States Securities and Exchange Commission. sec.gov/Archives/edgar/ data/1393612/000119312511014919/d10k.htm.)
An additional fee charged to a merchant for mid-qualified and nonqualified transactions. Downgrade fees are typical in fixed-rate pricing when a low rate is promised to the merchant but the actual all-in rate is much higher to accept certain types of credit and debit cards (for example, rewards cards or corporate cards).
Independent Sales Organization (ISO)
A company that independently solicits potential merchants on behalf of an acquirer or a processor.
The process by which all banking parties involved in a credit or debit card transaction (processors, acquirers, issuers) manage the processing, clearing, and settlement of credit and debit card transactions, including the assessment, collection, and distribution of fees between parties.
A fee paid by an acquiring bank to an issuing bank for transactions entered into interchange. The interchange fee consists of a discount rate applied to the dollar amount of each transaction as well as a transaction fee (swipe fee).
A transaction must meet certain predetermined criteria to be categorized in a specific interchange category. Each transaction is evaluated individually, so it is possible for each monthly transaction a merchant processes to have a different interchange fee associated with it.
Interchange fees are ultimately passed along to the merchant.
Internet Merchant Account
A specific type of merchant account that is required for merchants who wish to sell goods and services over the Internet and accept credit and debit cards as payment via a company website. Transactions that occur on this type of an account are considered card-not-present transactions and require a payment gateway.
Issuing Bank or Issuer
Any banking institution that offers credit and debit cards to its clients. Virtually all banking institutions in the United States are issuing banks.
A transaction that involves keying in the credit or debit card account number using a computer or standalone credit card terminal. Keyed- in transactions occur in card-not-present environments such as mail order, telephone order and Internet-based businesses.
A batch settlement that is manually initiated by the merchant on a daily basis.
A leading global payments company that provides a critical economic link among financial institutions, businesses, merchants, cardholders and governments worldwide, enabling them to use electronic forms of payment instead of cash and checks. ("2010 Form 10-K, MasterCard Incorporated". United States Securities and Exchange Commission. sec.gov/Archives/edgar/ data/1141391/000119312511044721/d10k.htm.)
A retailer or any other entity that agrees to accept credit and/or debit cards from its customers.
A commercial account that enables a merchant to accept credit cards, debit cards, and other forms of electronic payment.
A written agreement between a merchant and an acquiring bank/ processor containing their respective rights, duties, and obligations with respect to acceptance of credit cards, debit cards, and other forms of electronic payment as well as matters related to bank card activity associated with the merchant account.
Merchant Identification Number (MID)
A unique number that is assigned by the acquirer/processor to identify a merchant and maintain proper financial records.
Merchant Services Provider (MSP)
An entity that provides merchant services to business owners. Merchant services providers consist of acquirers, processors, ISOs, and banks.
Throughout this book MSP will be used interchangeably with acquirers, processors, ISOs, and banks.
The communication from the MSP to the merchant detailing the credit and debit card transactions that occurred in a specific month and the associated fees.
Mail order/telephone order.
A broad industry term that describes a transaction that holds a higher percentage of risk to the issuing bank.
Transactions are categorized as nonqualified for various reasons, including
the manual entry of credit or debit card information,
failure to settle the transaction in a timely manner, or
the type of credit or debit card presented to the merchant.
Examples of nonqualified cards include rewards, international, and corporate cards.
A computer-based system that facilitates the processing of credit and debit card transactions over the Internet. Payment gateways will encrypt sensitive information to ensure a secure transmission between the parties involved.
PCI DSS (Payment Card Industry Data Security Standard)
A worldwide information security standard assembled by the founding payment brands of the Payment Card Industry Security Standards Council (PCI SSC), including American Express, Discover Financial Services, JCB International, MasterCard Worldwide, and Visa Inc. International. The PCI DSS is a set of comprehensive requirements designed to help organizations proactively protect customer account data.
Point of Sale (POS)
A location where credit and debit card transactions are performed with the cardholder present. POS terminals facilitate transactions.
A large data center that processes credit and debit card transactions in addition to settling merchant funds utilizing an acquiring bank relationship. A processor connects to the merchant on behalf of an acquiring bank via a standalone terminal, payment gateway, or POS system to process payments electronically.
A reserve or holdback is established by the issuing bank to help alleviate risk associated with higher-volume and higher-risk merchants. Reserves may be funded by a merchant with a cash deposit or a percentage of gross sales.
A request initiated by a cardholder or issuing bank for documentation concerning a transaction. A retrieval request can lead to a chargeback.
Secure Sockets Layer (SSL)
An encryption system that allows merchants to process transactions securely over the Internet.
Standard industry classification code. Four-digit number used to identify a specific business type.
A transaction that involves credit or debit card information being transferred directly to the processor as a result of swiping or sliding the card through a card reader or POS terminal. Also called a card- present transaction.
A fee charged to a merchant for each credit or debit card transaction. Transaction fees are in addition to any discount rate. Transaction fees are a part of interchange fees and can also be a part of the additional fees charged by an MSP.
A global payments technology company that connects consumers, businesses, banks and governments in more than 200 countries and territories, enabling them to use digital currency instead of cash and checks. ("2010 Form 10-K, Visa Inc.". United States Securities and Exchange Commission. sec.gov/Archives/edgar/ data/1403161/000119312510265236/d10k.htm)
An authorization that is obtained over the phone. If the transaction is approved, the merchant is provided with an authorization code, which is used to settle the transaction through a credit card terminal, POS terminal, or payment gateway at a later time. There are often additional fees associated with a voice authorization.
The reversal of an approved transaction that has been authorized but not settled. In order to reverse settled transactions, a credit must be processed.
Different Ways Merchants Accept Credit and Debit Card Payments
The majority of credit and debit card transactions are sent electronically to acquiring banks and issuing banks for authorization, capture, and settlement. Various methods exist for presenting a credit or debit card sale to the payments system. In all circumstances, one of the following things occur:
the entire magnetic strip on the back of the card is read by a swipe through a credit card terminal or POS terminal;
a computer chip is read; or
credit or debit card information is manually entered into a credit card terminal, computer, or website.
A credit card terminal
is a standalone piece of electronic equipment that allows a merchant to input transaction information and swipe or key-enter credit or debit card information;
is typically plugged into a power supply and connected to a telephone line or an Internet-based (IP) connection; and
may be powered by batteries and communicate through a cellular phone data network.
Excerpted from You're a Business Owner, NOT A DUMMY! by Michael Mintz Copyright © 2012 by Michael Mintz. Excerpted by permission of iUniverse, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents
Chapter 1 How Does the Credit and Debit Card Process Work?....................1
Chapter 2 What Is Interchange, and Why Do You Care about It?....................22
Chapter 3 Who Makes What on Each Transaction?....................29
Chapter 4 Pricing Strategies and Additional Fees: The Real Truth....................37
Chapter 5 My Month-End Statement Makes No Sense—Please Help!....................56
Chapter 6 PCI Compliance: Why Do You Care?....................86
Chapter 7 The Durbin Amendment: What Does It Mean to You?....................90
Chapter 8 A Checklist to Use Before You Make a Decision....................93
Chapter 9 American Express....................96