Payment processing is seldom a straight line. But do you know just how many twists and turns the journey from accepting a credit card for payment to getting your funds can include? And what the twists can cost you? Many merchants don’t. And this lack of knowledge can be especially costly to businesses in sectors considered higher risk when seeking a payment processing account.
Every party that participates in the payments process – and there can be a half-dozen or more – receives compensation for their role in the authorization and settlement process. Those charges can add up, especially when extra entities are included in the process.
Following is a lineup of the main parties involved in payment processing, how they make money from merchants – with a special note on high-risk businesses – and what you need to know to understand and evaluate your payment processing relationships.
At first glance, the entities and actions involved in a payment transaction seem simple: you, as the supplier or merchant, and your customer. You sell and the customer buys. But a number of financial institutions and other service providers have a hand in making that process work:
The acquiring bank or sponsor bank. The financial institution that maintains merchant accounts. One of an acquiring bank’s key roles is to deposit your funds from credit card sales into your merchant account. MerchantE has direct relationships with several sponsor banks.
The issuing bank. The financial institution that gives a credit card account to your customer, the cardholder. Issuing banks authorize the transaction at time of payment, and deposit the funds to the acquiring bank when customers purchase using payment cards.
Card networks. The credit card brands – Visa, Mastercard, American Express, Discover, UnionPay, and so on. Card networks set the interchange rates that an acquiring bank pays to a card-issuing bank each time the acquiring bank facilitates a payment card transaction.
Payment processors. Third-party companies that send credit card payment details to the card network and forward payment authorization and settlement funds to the acquiring bank.
In some cases two kinds of processors are involved. Front-end processors are connected to various card associations and facilitate authorization of transactions to merchants. Back-end processors receive and then forward settlement funds to acquiring banks in a scheduled time frame.
MerchantE is one of only a few end-to-end payment processors that fulfill the entire range of front- and back-end functions. An end-to-end processor has visibility to the entire process, which puts them in a better position to problem-solve when a merchant needs support. In addition, having one processor means fewer parties receive fees from every transaction, so the merchant has fewer fees to pay.
Independent sales organizations (ISOs) and Integrated software vendors (ISVs). ISOs are resellers of credit card processing services to businesses; they partner with specific acquirers or processors to resell merchant payment services. ISVs are software providers that integrate their application with a payment processor to allow their software users to accept payments right within the software. ISVs typically refer their customers to a payment processor.
Payment gateways. Securely transmit payment data for online transactions to a processor. With an end-to-end processor like MerchantE, there is no need for a third-party payment gateway.
Each of these entities make money in their own way – some, in more than one way. Flat, per-transaction and/or volume-based fees are the main income sources for banks and processors, while those who sell or refer merchant services typically earn commissions or referral fees. The credit card networks make their money on assessment fees. Since the number of parties can vary, the total of the fees for payment processing can also vary from one merchant to another depending on who their payment processor is.
Accepting credit cards involves accepting risk. On the merchant’s side, those risks include declines (which are discouraging to customers and can cost you sales), chargebacks, and fraud. On the credit card and bank side, they include non-payment, in addition to chargebacks and fraud.
Not surprisingly, interchange rates reflect that risk. Debit cards, consumer credit cards, and swiped transactions have lower rates, respectively, than credit cards, business credit cards, and keyed transactions.
Businesses themselves can be considered high-risk. Merchants are tagged with a high-risk label for a number of reasons, such as having previously lost a merchant account due to an unusually high number of chargebacks; a merchant with bad credit or no credit card processing history; or a business that has high value transactions, where a single fraudulent transaction can be costly.
Another reason some businesses are considered high-risk is the nature of the business itself. In addition to an increased pattern of chargebacks in the industry, businesses generally are labeled high-risk if they are regulated, subject to age restrictions in sales, or tend to be targets for fraud. Examples of high-risk businesses include CBD, firearms and ammunition, telemedicine and pharmacies, credit repair, online gaming, and online marketplaces.
High-risk businesses are often unable to secure a standard merchant account with acquiring banks. They need a high-risk merchant account, which typically means restrictions and higher fees. They also find their choices limited, as many banks don’t want to accept the issues that high-risk businesses might bring with them, even if they make more money from such customers.
Knowledge equals power and often savings
Gaining a better understanding of the payment process and the parties to a payment card transaction can help you make smarter decisions that can have a meaningful impact on your business’s finances.
Use a full-service payment processor. You can save money by contracting with a payment provider that manages the end-to-end payment process from authorization to settlement without intermediary entities involved. You will also spend less time trying to track down which entity can help you solve a problem with approvals and funding.
Understand high-risk payment issues and how to mitigate them. Partnering with a secure, reliable credit card processor can reduce fraud and improve the financial standing of high-risk businesses. “High risk” does not mean a business is disreputable. Working with a reliable payment processor that serves a broad range of industries, including low- to moderate-risk businesses, adds authenticity to the reputation of a higher risk business.
Now more than ever, acceptance of electronic payments is critically important to sales and growth, especially when building an ecommerce business. And with credit and debit card use growing, if an organization cannot accept payment cards, it will lose out. Especially for those businesses historically regarded as high risk, securing a merchant account has been challenging, often with prohibitive fees. But by partnering with the right payment processor, the path to building a business and offering customers preferred payment methods is more accessible than ever.
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