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Education

StreetSmarts SM

Understanding merchant processing

By John Tucker strategically to where it is neither so high that merchants
1st Capital Loans LLC would not want to accept credit cards nor too low to
where issuing banks (which receive the revenue from
or nearly a year now as quarterback of the Street interchange) would opt out of assuming the upfront risks
Smarts column, I've discussed rebranding associated with issuing cards.
SM
options that you, as a merchant level sales-
F person (MLS), can use to lead in with and tie Discover Financial Services and American Express Co.
merchant processing into the solution implementation on control the issuing of their own bankcards and have,
the back-end. But what exactly is merchant processing? in prior years, been criticized by merchants for having
This article discusses the in-depth particulars of merchant higher costs than Visa- and Mastercard-branded cards.
processing that, unfortunately, due to the low level of To address this issue, Discover created the Discover
training provided in our industry, many MLSs might not Acquiring program and AmEx created the Opt Blue
fully understand. program. Both provide merchants the opportunity to
have lower pricing.
The use of bankcards as a payment option dates back to The players and how they get paid
at least the 1950s. A merchant account is an unsecured
line of credit provided to a merchant by a registered Visa and Mastercard are publicly traded companies with
independent sales organization (ISO) or merchant service their own card brands. They each manage a group of
provider (MSP), and a sponsor (acquiring) bank, that member banks, which includes issuing and acquiring
enable the merchant to accept credit cards from customers (sponsoring) banks. Member banks pay Visa and
who received cards from issuing banks. Mastercard membership dues, which allows them to
Interchange market their respective brands in the market.
During the processing of a credit card transaction, Issuing banks issue credit cards with credit limits to
certain fees are charged, and interchange is one of them. consumers after they meet certain credit criteria. Issuing
Interchange varies depending on type of card used, and banks are paid the revenue from interchange.
costs are listed for every type of card a merchant could
run at the POS. You have interchange for credit cards, as Sponsor (acquiring) banks work with registered ISOs/
well as signature debit cards run offline as credit cards MSPs to approve merchants for merchant accounts and
and PIN debit cards that are run online and for which process payments through front-end authorization
PINs are entered at the POS. networks, as well as settle transactions through back-end
networks.
There might be from 100 to 200 categories of interchange,
and categories determine pricing. The pricing is set ISOs/MSPs market merchant accounts to the public and
are paid by marking up interchange. They are also paid

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