2014-03-17 20:00 -0400
I want to understand credit card processing. So I will probably write a few articles about it. This article has some fundamental definitions.
An acquiring bank is a bank which processes card payments on behalf of a merchant. The term ‘acquirer’ indicates the bank accepts (or acquires) credit card payments from card issuing banks within a credit card association. Acquirers take all the risk and bear the burdern of most of the regulation. Examples of acquirers are Bank of America, FirstData, and Chase.
credit card association
Examples of credit card associations include Visa, MasterCard, Discover, American Express, etc.
An issuing bank is a bank which provides credit cards to consumers. The term ‘issue’ indicates the bank issues payments to the acquiring bank on behalf of the consumer. The top issuers in the US are American Express and Chase.
A payment processor is a company which peforms the actual funds transfer. Its the technical underpinning of a transaction. Processors do authorization, funds transfer, statements, calculate the interchange fee, and handle dispute management. Processors take no risk on a transaction. Examples of companies who are processors are FirstData, Chase, and RBS WorldPay.
A payment gateway is a service which ties all the various groups together and provides a nice simple interface for the merchant to build a shopping cart or marketplace without needing to understand all the gory details. The gateway authorizes credit card payments by facillitating the transfer of information between a merchant’s bank (the acquiring bank) and a customer’s bank (the issuing bank).
A merchant account is a type of bank account provided by an acquiring bank which allows merchants to accept payments via credit card.
The interchange fee is the fee paid to the issuing bank by the acquiring bank. The amount varies by card type, card brand, transaction amount, and other factors and is set by the card associations like Visa, Mastercard, or Discover.
The discount rate is made up of several different fees which are charged to the merchant. This usually includes the interchange fee. The discount rate is a fixed percentage-based fee charged for each transaction. A portion of the fee is passed to the acquiring bank who likely passes a portion to the issuing bank who in turn passes a portion to the credit card association.
Rates are influenced by many things including the level of risk. Brick and mortar stores where a card is physically present are considered the lowest risk. There are three categories of transaction types based on risk and each have a different discount rate: qualified, mid-qualified and non-qualified. Internet transactions are non-qualified which is the most expensive category.
1 basis point is 1%. A term sometimes used when discussing the discount rate.
Average Ticket Size (AVT)
The might make more sense to outsiders if they had called it Average Transaction Size. Its the total monthly sales amount divided by the total number of transactions for that month. Merchant account rates and fees are often based on a merchant’s monthly AVT.
PCI stands for Payment Card Industry. DSS stands for Data Security Standard. It is a set of security standards for organizations who handle cardholder information. It is defined by the PCI Security Standards Council (PCI SSC) which was formed in 2006 by the major card associations. Note that there is a difference between being compliant being validated as compliant. Validation is done annually by a Qualified Security Accessor (QSA) who creates a Report on Compliance (ROC) for organizations handle lots of transactions or a Self-Assessment Questionaire (SAQ) for companies handling less transactions.