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Processing Explained





Credit Card Processing Explained







I would first like to explain just how this industry operates with a credit card transaction and what happens to that transaction when it is Visa or MasterCard.  


Visa U.S.A. Inc. ("Visa") and MasterCard International Inc. ("MasterCard") are associations of banks that electronically exchange sales drafts and chargeback's for credits and debits.  These two corporations are called  "Associations".  These sales drafts or transactions are electronically transferred from banks that acquire them from merchants such as you.  Commonly, the transactions are transferred through credit card terminals or software POS programs of retail merchants.  These banks are referred to as"Acquirers". 

From these acquirers, through the appropriate Association, Visa or MasterCard, then to the bank that issued the Cardholder's credit card.  These banks are referred to as "Issuers".  The Issuing banks then bill their cardholders for the transactions.  The Associations charge the acquirers interchange fees and assessments for submitting transactions into their systems.  Then the Acquirer charges the merchant.


These charges to the Acquirers of interchange fees and assessments are what we in the industry call our "buy rate" or the cost that is paid to transact the transaction.  You can relate this cost the same way that you must pay for your goods or services in your place of business.  So a substantial portion of the discount or transaction fees that you pay will go toward these fees and assessments with the difference going towards the profit for the Acquirers.  In order to speed up the payment process, the Issuer transfers the funds back through the Association to the Acquirer at approximately the same time that the Issuer receives the electronic Sales Drafts. 


The Associations have developed rules and regulations that govern their member banks in the procedures, responsibilities and allocation of risk for this process.  The Association rules and gives cardholders and issuing banks certain rights to dispute transactions, even long after payment has been made to the merchant. These disputed transactions are called, "Chargebacks", which I will explain in more detail later and to help you eliminate these possible costs.


What is important to the merchant on the initial start-up is that the merchant is set up correctly by the bank, ISO (independent service organizations) or processor so that they will pay the minimum amount of fees that are in addition to their quoted swipe fees.


What I mean by this, which will be explained more in this book, is that there are many types of credit cardholders and types of credit card transactions.  Prior to being set up with the merchant program, it is very important to profile the merchant as to how they are accepting transactions (face to face, keyed, etc.) and what type of cardholders are they (consumer, corporate, debit, etc.). 


If the merchant is not profiled correctly, then that merchant will be paying additional high enhanced charges for accepting these other cards and cardholder types.  This will be more explained as you read this book.


I hope that this helps explain what happens when a credit card is swiped and put through the network.  I try not to go into much detail about this for it is not too important but do want you to understand the difference between Acquirers and Issuers and most importantly that you, the merchant,


Must be set up correctly and not pay additional high

"Unneeded Fees"