By Adam Atlas
Attorney at Law
The payments industry has many components that take on different roles. Some intertwine to function financially, while others establish rules for all to abide by.
Who is at the top of the payments pyramid, anyway? A number of participants in our industry do not know the basic structure of the merchant services business.
Starting at the top of the pyramid, there are six tiers in the payments industry:
Understanding some of the principal tiers and the roles of each will help you figure out where your business fits in the larger matrix of credit card acquiring.
The card Associations, which are best exemplified by Visa Inc. and MasterCard Worldwide, were created as associations of banks that got together to cooperate on the branding of credit card issuing and acceptance, as well as building and maintaining networks over which credit card transactions can be processed.
Associations have traditionally been wholly owned by banks. Now that MasterCard is public and Visa is on track to do the same, the card Associations can be seen less as associations of banks and more as stand-alone businesses that have more independence from their founding shareholders.
Nonetheless, as a merchant services professional, it's important to remember card Associations were formed by banks to further bank interests.
To this day, virtually all of the frontline action in the merchant acquiring business is carried out by banks that are affiliated with Visa or MasterCard, while Visa and MasterCard stand back and handle higher level matters such as branding and enforcement.
Enforcement is a way of policing the merchant acquiring industry to make sure everyone plays by the same set of rules. The rules, in this case, are enacted by the card Associations and are applied to virtually everyone who participates in our industry.
While there has been talk of making the rules public, there are still a number of banks that refuse to share them with their sponsored ISOs.
The card Associations have compliance personnel who scour the Internet and marketplace for things like noncompliant Web sites.
I believe the card Associations used to pass their income through to their member banks or run as nonprofit associations, but now that they are going public, they are likely to be more interested in accumulating profits than ever before.
An acquiring bank is a financial institution that contracts with merchants to settle electronic transactions. The acquiring bank provides merchants with credit card processing accounts. This bank sends the credit card and purchase information from transactions to the card Associations, which forwards it to the issuing bank.
Credit card acquiring is the flip side of issuing. If there were no issuing, there certainly wouldn't be anything to acquire. The revenue on interest from unpaid credit card balances is probably far greater than revenue from acquiring and related discount rates.
While we all earn our living from the acquiring side, the issuing portion of the industry is where the real gravy is. In any case, banks are the only entities permitted by the card Associations' rules to settle transactions for credit cards.
Merchants are also obliged to enter agreements directly with a bank to procure credit card processing services.
A processor or an ISO has the option to be party to the agreement, but the bank is required. Given their monopoly on fund settlement, banks control all the money in our business. Banks, however, need help from processors.
Credit card (or third party) processors are hard to define because they can come in a number of forms. The basic purpose of a processor is to handle the secure transaction and other communication between the POS, the acquiring bank and the card Associations.
Banks sometimes engage processors to handle more than authorizations and have processors assist in the settlement of funds.
Web-based processors usually must first establish a merchant account before contracting for credit card processing services.
As most readers know, a vast quantity of information needs to be processed for any given merchant's daily transactions, and processors are in the business of handling that information for banks.
Some processors are so large that they resemble banks - appearing to do everything that banks do.
First Data Corp., Chase Paymentech Solutions LLC and Global Payments Inc. are examples of high-level processors that carry much of the processing responsibilities that would otherwise fall on banks.
Processors often enter into ISO agreements to permit ISOs to bring merchant business to the processors' respective sponsoring banks.
ISOs are in the business of soliciting merchants to offer them the merchant services of a specific bank. ISOs can be registered or unregistered.
If they are registered, it means they have the right to solicit merchants in their own name, while unregistered ISOs are obliged to use only the name of the processor or sponsored entity to which they send completed merchant applications.
ISOs are at the heart of our industry. Their primary purpose is the acquisition and implementation, or boarding, of new merchant accounts.
ISOs can range in size from one-person shops to large, international organizations. Most ISOs started out as independent contractors or agents and grew their sales organizations to where they became stand-alone operations.
Most ISOs close more than 20 merchants per month, some close more than 1,000. Some ISOs also handle payment processing and are sometimes referred to as super ISOs.
Super ISO is not an official term. Instead, it is one the industry customarily uses when referring to an ISO that has assumed some of the rights and obligations of a processor.
Super ISOs are able to board and support registered and unregistered ISOs under them.
Not all ISOs have enough customer service and other support mechanisms to be able to stand alone under a processor.
As such, some of them prefer to start under an existing ISO that can provide support and systems to help get the new ISO off the ground.
A BIN (bank identification number) relationship is the ultimate control a super ISO can have over a merchant program without actually being a bank itself.
Merchant level salespeople (MLSs) are typically agents who work as independent contractors under ISOs. However, some MLSs are ISO employees.
Whether independent contractors or employees, MLSs are not registered, and they may not sell in their own names. They must use the names of the sponsored entities above them.
An MLS is an individual whose primary activity is the direct acquisition and procurement of prospective merchant accounts - from introduction to handling conversions and applications to eventual deployment.
Some ISOs and MLSs hire individuals to work with them as employees of their merchant services businesses.
Employees typically devote their full time and attention to the employer who hires them, while agents are not bound to provide their full time and attention to the entity that retains them.
The legal distinction between an employee and an independent contractor varies from state to state. It is important to know the difference in your state because it can have important tax ramifications for the entity retaining the employee or contractor.
This is a very basic summary of the payments industry's hierarchy. A key thing to remember is the definitions for each entity are not set in stone and may vary case by case.
Interestingly, the place at which you find yourself on the hierarchy will not necessarily be an indicator of your financial success (with some exceptions - banks often do very well, while employees see average wages).
Some MLSs in our industry bring home more money than ISOs. Choosing the right spot for you involves learning and making business decisions. I hope 2008 will be full of learning and good decisions for all.
In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If you require legal advice or other expert assistance, seek the services of a competent professional. For further information on this article, e-mail Adam Atlas, Attorney at Law, at atlas@adamatlas.com or call him at 514-842-0886.
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