Master Card Processsing
Accepting Visa, MasterCard and American Express
The visible parts of the credit card transaction seem plain. Merchant credit card processing starts when a card is presented and an authorization obtained. No muss, no fuss.
But accepting credit cards is much more than this. That magic bit of plastic with the well known logo doesn’t connect directly to MasterCard, Visa or Amex – in the way a debit card would withdraw directly from a checking account. The real details are behind the scenes.
We’ve already met the merchant and the cardholder. When a sale is made, the transaction creates a debt. The next step on the food chain is the acquiring bank – this is the bank where the merchant has an account, the merchant account. The reason this financial institution is called the acquiring bank is because they acquire the debt.
Next, the acquiring bank accesses the network – a different one for each brand of credit card. The critical thing about the networks is that they don’t actually issue the credit cards. They are middlemen who manage the data and advertise their brands to consumers.
Finally, the debt reaches the issuing bank. These are the banks who actually lend the money to the consumer. In some cases, the issuing banks own the network. MasterCard works this way, but otherwise they simply pay for the right to issue credit cards with a particular logo.
The reason for this three-step dance is so that credit cards can be used all over the US or even internationally. The merchant doesn’t need to have a relationship with the issuing bank as long as the bank that holds their merchant account can deal through the network.
American Express is slightly different in that they handle all three of the functions above (although this is changing).
Each of the three steps costs money and the total is lumped in as a fee applied to sales. The percentage a merchant pays to participate is called the discount rate and the fees collected are called interchange revenue. While the acquiring bank and the network keep their share of the interchange revenue, the issuing bank also makes money on interest charged to the consumer directly – they might then use the interchange revenue to give cash back bonuses or other incentives. The Amex business model depends on this because Amex collects all three chunks of the interchange rate (they also charge a slightly higher rate) they are able to use this to give more perks to their customers.
The Merchant’s Role
Your relationship will be with the acquiring bank through a business merchant account. This is a special account used to handle credit card processing. Part of signing up for this will include agreeing to the fee structure and regulations put in place by your bank and the network. You should not have to deal with the issuing bank directly at all.
One decision will be what types of credit cards you wish to accept. As mentioned above, Amex has a higher fee, but there are considerations for each brand of card. Master Card processing requirements will vary a bit from those used in a Visa merchant account, for instance. Since you do not deal directly with the network though, you only have to make sure your merchant account bank does. The data you have to collect might be slightly different for each type of card.
When you are shopping for the best merchant rates for your credit card merchant account, the discount rate will be mentioned quite a bit. Lower is better. However, this isn’t the whole picture. Since you will only deal with your own merchant processing account, whatever service you sign up with will be the “face” of your merchant account processing. This company will have a variety of fees related to the services they offer you.
Merchant Solutions
There are two overwhelming concerns for entrepreneurs who want to process credit cards. The first is “How to accept credit cards” and the second is, “Where do I find the best rate merchant accounts?”
A third, and growing concern is, “Can I take credit cards online?”
While these are all important questions, the truth is that the best credit card processing has to be customized for the business asking. Merchant credit card services are not cookie-cutter operations. For instance, when McDonalds was negotiating with American Express to take their cards, the higher merchant fees were a problem. McDonald’s sells a high volume of merchandise, but individual transactions and profit margins are relatively small. Amex agreed to lower its fees in light of this – otherwise, Amex wouldn’t be accepted at McDonalds.
You probably don’t have the leverage of McDonalds Corporation, but even so, if you sell fewer, high-ticket items, it might be to your advantage to take on a higher discount rate with lower overall fees. This is because the fixed fees can represent a large part of your cost for merchant card services. The relevant fees include (but aren’t limited to): monthly minimum fee, membership fee, statement fees, transaction fees, penalties for chargebacks and cancellation, account service fees. All of those are beyond the basic merchant discount rate.
Rather than a standard contract, your credit card merchant services should flow from both the type and volume of business you do. A good processing company will ask you a great deal about your business (both current and anticipated) to match the best overall structure to your needs.
A good analogy is to when you set up your business checking account. The choices revolve around interest (or none) on balances, free checks, overdraft protection, no per-check fee, and maybe a free toaster. Everyone knows the bank isn’t out to lose money; if they give you something in one spot, they are probably making it up elsewhere. The wise move is to figure out which benefit offers the most value. The checking account you get has to fit the way you actually use checks and the same applies when opening your merchant card processing account.
Other Factors
Credit card merchant processing options will also vary depending on what you bring to the table. Naturally, the better your credit history and the higher your sales volume, the more attractive a customer you will be. Actual credit card process fees (the discount rate) may be lowered to get your business, or other fees might be waived.
Even a small business, as it gains a history of meeting its obligations, may qualify for a better deal. Be aware that when you open a merchant account you could be “locked in” for some set period – with a penalty for stopping the contract early. Longer contracts might offer incentives for credit cards processing with the tradeoff of not being able to jump ship easily.
Expect to get answers to all your questions from any company you sign up with. How well they explain things to you initially is a good measure of how they will treat you down the road. Do not forget that you are the customer here.
