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Education

through related fees charged to merchants such as annual
fees, statement fees and batch fees. During the processing of
How the transaction process works a credit card transaction,
From start to finish, here is how a $50 credit card certain fees are charged, and
transaction is completed: interchange is one of them.
• Sandra is approved for a Visa Rewards Card with Interchange varies depending
a $5,000 line of credit from an issuing bank. While
on the other side of town, Billy, owner of Billy's on type of card used, and costs
Meat Market, is approved for a merchant account
by an ISO/MSP and receives a free terminal to are listed for every type of card a
process transactions. merchant could run at the POS.
• Sandra purchases $50 worth of items at Billy's Meat
Market using her Visa Rewards Card. When she
swipes her card through the credit card terminal, ISO/MSP that underwrote the merchant account is most
the ISO/MSP sends the data to the acquiring bank, likely on the hook for paying for the $50 instead.
which sends it to Visa, which sends it to the issuing
bank to verify that Sandra has a remaining credit This is why during the underwriting of a merchant account,
limit large enough for the requested transaction. the ISO/MSP is conducting an analysis on the industry that
• Let's say Sandra's credit limit is sufficient, the the merchant operates in, as well as the merchant's credit
issuing bank creates an authorization code and score and history of previous chargebacks, to determine
sends it to the acquiring bank, which sends the if the merchant is likely to receive a high amount of
code to the ISO/MSP via the credit card terminal, chargebacks going forward, which could potentially put
prompting Billy to see an "approval" notification. the ISO/MSP at risk.

• Billy prints out a receipt for Sandra to sign, then Also, many sponsor banks don't want to be associated
batches out all of his credit card transactions at with certain merchant types that have a history of high
night via the terminal. After the batch, the ISO/ chargebacks. This is why certain categories of merchants
MSP deposits the $50 transaction into Billy's bank are considered low risk and some are considered high
account within 48 hours, then bills him at the risk. Low-risk merchants would be those with a lower
end of the month for interchange, the mark-up of likelihood of chargebacks due to transactions taking place
interchange, and other fees such as the monthly face-to-face (Billy's Meat Market, for example). Low-risk
statement fee, batch fee, etc. Sandra is sent a bill merchants are likely to receive faster approval with a
within 30 days by her issuing bank listing the lower amount of documentation needed for underwriting.
transaction of $50 from Billy's Meat Market.
Higher-risk merchants are those who never see their
Understanding underwriting customers during transactions (online merchants, for
example) or merchants in industries where customers
When Billy runs Sandra's credit card for $50, he receives routinely challenge transactions. These include the high-
the full amount from the ISO/MSP within 48 hours, risk merchant categories on many ISO/MSP "prohibited"
even though Sandra technically hasn't paid for the $50 lists. To be approved, merchants in these categories require
transaction yet. Her credit card issuer won't send her a higher levels of documentation during underwriting.
statement with the transaction listed for payment until up Underwriting them will also take a bit longer, and
to 30 days from the transaction date. This means Billy is they might even have to be placed offshore, as offshore
receiving an unsecured line of credit. providers, at times, can take on higher levels of risk than
domestic providers can assume.
The risk of this transaction would come if Sandra were to
initiate a chargeback of the $50 transaction, and if Billy
were to lose the chargeback case, the $50 would have to John Tucker has over 10 years of professional experience in commercial
be refunded to Sandra's credit card. Thus, she wouldn't finance and business development. He is also an M.B.A. graduate and
have to pay her issuing bank for the transaction. But if the holder of three bachelor's degrees in accounting, business management
ISO/MSP proceeds to obtain the refund amount (plus a and journalism. To connect with John, please send him a connection
chargeback fee and retrieval fee) from Billy's Meat Market's invite via LinkedIn at www.linkedin.com/in/johntucker99 or email him
bank account and there's no money in the account, the at tucker@1stcapitalloans.com.

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