This educational section is meant to provide business owners with information on how the credit card processing industry works. If you have questions about any of the following information please email us directly or call 502-964-6030 or 1-855-208-7284.
Stakeholders in the Card Processing Ecosystem
The merchant is the business establishment that accepts credit, debit, and prepaid cards. The business owner relies on their POS (point of sale) system to accept the form of payment presented by the cardholder. The merchant decides which type of services provider they will sign a contract with for their credit card payment acceptance services.
ISO (Independent Sales Organization)
ISOs manage one or more sales agents and typically set merchant pricing. These organizations support sales agents and, like the agents they employ, receive commission and residual income off each transaction that is processed. Remember, the more the merchant pays in credit card processing fees, the more the ISO makes.
Employed by ISOs and merchant acquirers, Sales Agents assist the merchant in obtaining a merchant processing account. The sales agent’s income is often based on commissions and a residual income stream determined by the rates that each merchant is offered. A Sales Agent can typically offer to beat your current rate, but will only do so on certain transaction types and sometimes the overall effective rate is actually higher. Sales agents will often try to upsell or lease credit card payment processing equipment to increase their personal income. Remember, the more the merchant pays in credit card processing fees, the more the sales agent makes.
POS providers are organizations that sell and install POS systems. Often, these providers will have contracts with an Independent Sales Organization, a merchant acquirer, or a core processor. These entities each receive residual income (commissions) off every transaction processed or for each referral to a new business. If your POS provider recommends that you should use a particular merchant acquirer or processor, it is very likely they are being paid commissions by that payment company for referring you and your business. Remember, the more the merchant pays in credit card processing fees, the more the POS providers make.
Acquirer and Sponsoring Bank
The acquirer typically owns the contract and works with ISOs, POS providers, and other distributors. The acquirer is responsible for settling all the money with the merchant and collecting all the fees paid by the merchant. The acquirer is also responsible for requesting authentication and authorization of the credit and debit cards in store or online and for collecting interchange fees, assessments and other network fees (transaction fees charged by the card networks), and all other processing and ancillary fees added by the acquirer. The acquirer is also responsible for contracting with a “sponsoring bank” which is the financial institution that underwrites the acquirer’s risk and represents the acquirer in various card network matters. Both the acquirer and the sponsoring bank receive income on every sales transaction. Remember, the more the merchant pays, the more the acquirer makes.
The core processors provide terminal software and POS interfaces that capture the transaction data originated at the POS. Core processors provide connectivity to card networks for authentication and authorizations and clear transactions into interchange. They provide risk monitoring, terminal balancing and support, customer service, and statements to merchants. There are only six or seven fully integrated core processors in the United States with significant scale. Almost every other provider in the merchant processing ecosystem is ultimately purchasing services from these core processors. Core processors typically are paid a set rate per transaction by the acquirer, regardless of how much the merchant pays for their services.
Credit Card Networks
The networks represent the credit, debit, and prepaid card brands. Examples include; Visa, MasterCard, Discover, and Pulse. The networks produce proprietary operating rules and regulations for the industry and provide the infrastructure for interchange, clearing and settlement. In addition, the networks monitor and produce guidelines for risk, provide statistical analysis, and develop new products, services, and market segments for the industry. Networks receive the network fees described in the How Card Processing Fees Work section.
The issuer represents the banks that issue the credit, debit, and prepaid cards. Examples include; Chase, Bank of America, U.S. Bank, and Capital One. The issuer provides cards to consumers and issues authentication and authorization as to whether the card is valid with available balances. Issuers receive the interchange fees described in the How Card Processing Fees Work section.
Since cardholders are the basis for the start of each transaction, they are very important players in how the credit card processing system works. Cardholders may use credit, debit, or prepaid cards to make a purchase, either in a brick and mortar store or online. The cardholder relies on a merchant to accept their form of payment in exchange for a good or service.