Learn all about Merchant Accounts, accept credit card payments online and apply for a free merchant account! |
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Merchant Account IQ - All About Merchant Accounts - Accepting Credit Cards Online - Compare Credit Card Processing Companies |
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Prospective Credit Card Merchant: You are a
new or prospective merchant who is excited about the opportunity to
accept credit cards as payment for the goods and services you provide.
You are probably thinking that this opportunity will make it easier for
your customers to pay you, open other avenues of marketing and selling
(e.g. the Internet), and protect you from the hassles and risks of bad
checks.
You are right - it can do all of this. However, accepting credit cards for payment carries with it some responsibilities, and is not entirely risk free to you, the merchant. (There is no free lunch!). This white paper is intended to provide you with some important information regarding: * How the credit card system works, * Some things to watch out for, and * Your responsibilities as a merchant. First, some definitions. Your customer, the "Cardholder", obtains his/her MasterCard or Visa credit card from a bank. The bank is called the "Issuing Bank" since it is the bank that issues the card to the Cardholder. (American Express and Discover work a bit differently, but the principles in this white paper apply to these card types too!). |
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| You, the Credit
Card Merchant, obtain your "Merchant Account" from a "Sponsoring Bank",
sometimes called an "Acquiring Bank" or "Merchant Bank". It is called a
Sponsoring Bank because the bank is sponsoring you, the Credit Card
Merchant, as a business that is qualified to accept credit cards. Your
Sponsoring Bank typically uses a "Processor" such as ECHO to acquire the
credit card transactions from you and process them through the bank
system. By giving a credit card to a Cardholder, the Issuing Bank is granting the Cardholder the rights to borrow money from the Issuing bank (up to a "Credit Limit") for the purposes of purchasing goods and services from a bona fide Credit Card Merchant such as yourself. How are transactions processed? When you, as a Credit Card Merchant, want to accept a credit card for payment of your goods and services, you first submit an authorization transaction to your Processor (e.g. ECHO). Your Processor accesses the Visa/MasterCard network to communicate the authorization transaction (containing a "Transaction Amount") to the Issuing Bank to ensure that the credit card is valid and that the Transaction Amount does not exceed the Cardholder's credit limit. The authorization transaction also puts a "hold" for the Transaction Amount on the Cardholder's credit limit. That way, the funds are available to you when you submit the corresponding "Deposit" transaction. If the authorization succeeds, and you subsequently (or at the same time) submit the Deposit transaction, you are informing (in effect promising) your Processor, your Sponsoring Bank, and the Issuing Bank that you are prepared to deliver to the cardholder the goods and services that are expected by the cardholder, and that you wish to receive payment for these goods and services from the Issuing Bank. Your Processor (e.g. ECHO), based on your Deposit instruction, then again works within the Visa/MasterCard network to request the Issuing Bank to deposit the "Net Settlement Amount" (i.e. the "Transaction Amount" less the "Discount Amount") into your bank account at your Sponsoring Bank. The Discount Amount (i.e. the Discount Rate times the Transaction Amount) and other fees, such as transaction fees, are used to pay the various entities that help you collect from the Issuing Bank. In particular, the Issuing Bank, the Visa/MasterCard Network, the Sponsoring Bank, and the Processor all share in dividing up the Discount Rate proceeds. OK, now lets talk about protection. Who does the credit card system protect? First, it provides some protection for you, the Credit Card Merchant. When you sell goods to a Cardholder, and you have received authorization for the Transaction Amount from the Issuing Bank, then the Issuing Bank is promising you that after you submit the Deposit transaction it will deduct the Transaction Amount from the Cardholder's credit limit, and in cooperation with your Processor, transfer the Net Settlement Amount into your bank account at your Sponsoring Bank. However, this promise from the Issuing Bank does not come without some strings attached. When you submit the Deposit transaction, you are, in effect, promising the Issuing Bank that you will deliver to the Cardholder the goods and services that you promised to the Cardholder. In effect, the Issuing Bank's promise to pay you is only as good as your promise to the Issuing Bank that you will deliver "expected" goods and services to the Cardholder. The word "expected" is important. If you have made representations to the Cardholder, leading the cardholder to create expectations in his/her mind, then by accepting a Credit Card for payment, you are in effect promising the Issuing Bank that you have or will "make good" on those expectations. iliusion |
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