A merchant account is a type of bank account that allows businesses to accept payments in multiple ways, typically debit or credit cards. A merchant account is established under an agreement between an acceptor and a merchant acquiring bank for the settlement of payment card transactions. In some cases a payment processor, independent sales organization (ISO), or member service provider (MSP) is also a party to the merchant agreement. Whether a merchant enters into a merchant agreement directly with an acquiring bank or through an aggregator, the agreement contractually binds the merchant to obey the operating regulations established by the card associations.
Today a majority of all credit card transactions are sent electronically to merchant processing banks for authorization, capture and deposit. Various methods exist for presenting a credit card sale to “the system.” In all circumstances either the entire magnetic strip is read by a swipe through a credit card terminal/reader, a computer chip is read (an “EMV”), or the credit card information is manually entered into a credit card terminal, a computer or website. The earliest methods, submitting credit card slips to a merchant processing bank by mail, or by accessing an Automated Response Unit (ARU) by telephone, are still in use today but have long been overshadowed by electronic devices. These early methods used two-part forms and a manual device for mechanically imprinting the embossed card number information onto the forms.
A credit card terminal is a stand-alone piece of electronic equipment that allows a merchant to swipe or key-enter a credit card’s information as well as additional information required to process a credit card transaction. They may be connected to Point of Sale systems and typically have a keypad and network connection and may have a built-in printer.
An ARU (also known as a voice authorization, capture and deposit) allows the manual keyed entry and subsequent authorization of a credit card over a cellular or land-line telephone. With this method, a merchant typically imprints their customer’s card with an imprinter to create a customer receipt and merchant copy, then process the transaction instantaneously over the phone.
Merchant accounts are marketed to merchants by two basic methods: either directly by the processor or sponsoring bank, or by an authorized agent for the bank and additionally directly registered with both Visa and MasterCard as an ISO/MSP (independent selling organization / member service
Marketing details are by card issuers like Visa and MasterCard, and are enforced by various rules and fines. A few of the largest processors also partner with warehouse clubs to promote merchant accounts to their business member.
To market merchant accounts, an ISO/MSP must be sponsored by a member bank. This sponsorship requires that the bank verify the financial stability and suitability of the company that will be marketing on its behalf. The ISO/MSP must also pay a fee to be registered with Visa and MasterCard and must comply with regulations in how they may market merchant accounts and the use of trademarks of Visa and MasterCard. One way to verify if an ISO/MSP is in compliance is to check a website or any other marketing material for a disclosure “company is a registered ISO/MSP of bank, town, state. FDIC insured”.
The authorization fee (actually an authorization request fee) is charged each time a transaction is sent to the card-issuing bank to be authorized. The fee applies whether or not the request is approved. Note this is not the same as a transaction fee.
Chargebacks are the largest risk that is presented to banks and providers. This is not to be confused with refunds, which are simply a merchant refunding a transaction. In the Visa, Discover, and MasterCard rules, the merchant’s processing bank is 100% responsible for all the transactions that the merchant performs. This can leave the provider open to millions of dollars of potential losses if the merchant operates in an illegal or risky manner and generates many chargebacks. The providers pass this cost on to the merchant, but if the merchant is fraudulent or simply does not have the money, the provider must pay all the costs to make the cardholder ‘whole’. The chargeback risk is the largest part taken into consideration during the contract application and underwriting process. Some banks are much more stringent than others when assessing a merchant’s chargeback risk.
If a merchant encounters a chargeback they may be assessed a fee by their acquiring bank. A potential chargeback is presented on behalf of the card holder’s bank to the merchant’s credit card processing bank.
Currently, both Visa and MasterCard require all merchants to maintain no more than 1% of dollar volume processed to be chargebacks. If the percentage goes above, there are penalties starting at $5,000 – $25,000 charged to the merchant’s processing bank and ultimately passed on to the merchant.
In all cases, a chargeback will cost the merchant the chargeback fee, typically $15–$30, plus the cost of the transaction and the amount processed.