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Archive for November, 2006
How Merchant Accounts Work
This article originally appeared on informed-merchant.com, a blog started by one of our founders, Sean, before he started TransFS.
This is a brief description of how credit card processing works. Credit card processing has two parts: Authorization and Settlement:
Authorization
Settlement
9. At the end of the day the Merchant sends the day’s “batch” of transactions to the Merchant Account Provider. If the merchant is using an Online Gateway or an IP-based terminal the batching is probably done automatically and is never really noticed by the merchant. If using an older dialup terminal the merchant probably has to hit a special button to initiate this process.
10-12. The merchant account provider sends the results to Visa / Mastercard
13. The Issuing bank adds the amount to the cardholder’s bill – the merchant no longer concerns themselves with the cardholder, unless there is a Chargeback or a Refund, because they will get paid no matter what. Collecting from the cardholder is the Issuing Bank’s responsibility.
14. The Issuing bank transfers the money to the Merchant Account Provider, using an ACH (Automated Clearing House) transfer.
15. Your Merchant Account Provider deposits (again using ACH) the proceeds into your business checking account.
Different Kinds of ISOs
This article originally appeared on informed-merchant.com, a blog started by one of our founders, Sean, before he started TransFS.
The supply chain for providing credit card processing services is long and complicated. One key to getting a good deal as a merchant is understanding how it works (see Merchant Account Supply Chain) and with whom you are negotiating.
One of the major types of players is the ISO (Independent Sales Organization). In short, most merchants buy their processing services from an ISO and the ISOs buy their processing services from a backend processor. However, depending on the situation there can be a very different split between the responsibilities of the ISO and the processor. Each ISO is classified depending on how much of the responsibility they take:
Overview
| Name | # | Also Known As… | Description |
| Tier I ISO | ~300 | Super ISO, Wholesale ISO, Full Liability ISO, Full Service ISO | Always do their own underwriting and risk-assessment and they bear full Chargeback Liability for their merchants and provide full technical support to their merchants. Tier I ISOs usually have at least 10 salespeople and a few support staff.Typically these are registered ISOs. |
| Tier II ISO | ~1,000 | Shared Liability ISO | Usually do not do their own underwriting, or at least are subject to underwriting approval from the ISO or processor with which they are contracted. They will usually have some technical support capabilities but most of the technical support is done by the ISO or processor with which they are contracted. They are called a shared-risk ISO because they usually bear a portion of the chargeback risk of their merchants. Tier II ISOs usually have 5-10 salespeople and maybe 1 or 2 support staff.Typically these are registered ISOs. |
| Tier III ISO | ~3,000 | Tier III ISOs are usually only a few salespeople, one of whom probably got started as an Agent for another ISO, decided to go into business for himself and hired a few others to work for him. Tier III ISOs typically do not provide any technical support to their merchants other than that provided by the salespeople, and they do not bear any chargeback risk. Since they don’t bear any chargeback risk they are subject to the underwriting guidelines of the ISO or processor with which they have contracted. Typically these are not registered ISOs. |
Implications
1. It is not always best to go with a Tier I ISO just because they offer their own technical support and underwriting. You might be better off going with a Tier III ISO that really cares about your business and contracts with a Tier I ISO for technical support. In that case, if there is a problem there are technical experts available to help (just as if you had contracted with the tier I ISO in the first place) as well as someone at the Tier III ISO to help you figure out the answer, push on the Tier I ISOs tech-support people, etc.
2. Tier I ISOs, in exchange for doing extra work, keep a larger portion of each transaction than Tier II ISOs, which in turn keep a larger portion of each transaction than Tier III ISOs. I don’t have any strong evidence about this point, but I would bet that Tier I and Tier II ISOs have more room to negotiate lower pricing, particularly for larger clients.
