Payments Processing can get complicated, so let this primer be your best way to guide.

Payments Processing

About Payments Processing – A man enters a bar. After taking his order, the bartender inquiries about starting a tab. With a “yes,” he offers her his credit card. The bartender gives the man his card and a receipt at the end of the night, and he leaves to go home.

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They both feel good. The man didn’t have to hand over any cash to get his drinks. The bartender didn’t have to keep track of dollar notes or worry about getting paid.

If you want to know about payments processing then your search ends here – How did the funds get from the client’s account to the bartender’s bank? To process the money flow, a network of payment service providers is needed. They must take action right away in order to give the bartender as little time as possible to determine whether the client has enough money in his account to pay for drinks. In order to prevent fraudsters from readily obtaining the man’s credit card information, they must also communicate securely.

These middlemen demand a fee in exchange for the speed and security they provide, as well as any card benefits associated with his transaction. Even though each card swipe may only cost a few cents, the trillions of dollars that are spent using cards annually quickly mount up to support a sizable payments sector.

This primer primarily addresses credit transactions because these are handled differently than debit ones. Credit card purchases are effectively loans from the card issuer to the customer that pass through a processor. On the other hand, debit card purchases are withdrawals made directly from the customer’s bank account.

Here are a handful of the various companies that participate in the swipes, taps, and clicks that are used to complete transactions throughout the American payment system.

Acquirers about Payments Processing

A bank known as an acquirer permits a retailer to accept credit and debit card payments. Other names for an acquirer include “acquiring bank,” “merchant acquiring bank,” and “merchant acquirer.” The acquirer manages withdrawing funds from a customer’s bank account when they make a purchase at a business.

But money doesn’t just start flowing in. It can take a few days for the acquirer to get in touch with the customer’s bank, make sure they have enough money to make the purchase, and then get the money back. In essence, the acquirer lends the company the money, enabling the merchant to get payment before the banks finalize the transaction.

And mistakes can be made. A credit card transaction may be disputed by a client, or a company may file for bankruptcy. If either of those things occurs, the acquirer is left to foot the bill. A business has a lower chance of finding acquirers prepared to work with it the riskier it is.

Acquirers receive compensation for taking on that risk in the form of fees from the companies they provide services to. Each time a firm accepts a card payment, there are acquirer costs that are added to the overall cost. The merchant discount rate is the name given to such sum.

It can be challenging to determine the merchant discount rate. The precise calculation is based on a number of variables, such as whether the customer used a credit or debit card to make their purchase and the individual businesses engaged in the card transaction.

Typically, a business will pay between two and three percent of a credit card transaction’s value, plus $0.10 to $0.20. In contrast, the fee that can be applied to the processing of a debit card transaction is governed by federal law and subject to change. Debit fees are capped at 0.05% plus 21 cents for bank issuers with $10 billion or more, with the latter amount subject to change by the Federal Reserve.

According to market research firm The Nilson Report, JPMorgan Chase, Wells Fargo, and Bank of America were the three largest acquiring banks in 2017.

Processors about Payments Processing

A company that handles payments creates a link between a company, an acquirer, and a customer’s bank. The third-party acts as an intermediary to make sure money transfers from the customer’s bank account to the business’s bank account.

The processor promptly executes an authorisation, or “auth,” to do this in order to quickly confirm that a consumer has enough money in their bank account for the transaction. According to Cliff Gray, a senior associate at TSG, the cash aren’t paid right away.

In the end, they have a capture file that is processed, and [processors] execute the authentication and save all the results, according to Gray. As a result, money must be sent from my bank account to the store’s account.

Instead of the acquirer handling the financial component of a card transaction, a processor takes care of the technical aspects. Here are some significant variations:

While the acquirer takes on the risk of fraud, the processor confirms that the customer has sufficient funds for the transaction.
While there will be a direct connection between the company and the acquirer, there may not always be one with the processor.
Through a card network, such as Visa or Mastercard, the processor communicates with the banks. The acquirer settles the transaction and is a participant in the card network.

Processors charge a fee to a business each time a card payment is made, similar to acquirers. The overall price an organization pays for each card transaction includes that fee as part of the merchant discount rate. A flat monthly cost in addition to an upfront charge for setting up a system to process payments may be assessed by the processor to businesses. It’s possible that there will be additional costs if a company chooses to discontinue the arrangement.

In reality, businesses may serve as both processors and acquirers. The two largest acquirers and processors are Fiserv and Fidelity National Information Services. Square and Stripe are two smaller finance companies that are making inroads.

Gateways about Payments Processing

A payment gateway enables a company to get client payment information. The point-of-sale terminal is the gateway in a physical store. The “checkout” page where a consumer enters their payment card details is the unique “gateway” in an online store.

A gateway’s responsibility is to gather and communicate a processor a customer’s payment information. One of the few components of the payments ecosystem that is visible to both the customer and the business, it is situated in between the business and the processor.

Square is one business that offers payment channels for physical stores. The financial services provider offers a point-of-sale device that accepts payments using a touch screen and a card reader.

PayPal is another well-liked e-commerce payment processor. A customer is taken to a PayPal page where they can choose a payment option that is saved in their PayPal account once they are ready to make a purchase from an online store.

Card Networks about Payments Processing

Payments Processing – All of the many participants in the ecosystem can communicate with one another thanks to a card network.

Without the network, neither the payment gateway nor the processor would be able to communicate with the customer’s bank or the acquirer. Businesses couldn’t take credit or debit card payments if there wasn’t a card network.

According to The Nilson Report, Visa has the largest network in the United States. By volume, it made up about 60% of debit and credit card transactions in the United States in 2022. Mastercard is the second-largest card network, followed by American Express and Discover.

These networks may be referred to as credit card networks, card associations, or credit card businesses, among other terms.

The “interchange fees” that card networks include in the merchant discount rate are how they make money. These fees fund the development and upkeep of the communication system as well as cardholder advantages like cash-back rebates, frequent flyer miles, and other extras.

Some businesses mandate a minimum purchase quantity before accepting credit cards from clients because interchange costs, which make up the majority of processing fees, are so high. Additionally, these are the reason why some companies exclusively accept cash payments or offer a discount for doing so.

Additionally, they caught the interest of American legislators, who in 2010 introduced the Durbin Amendment to the Dodd-Frank Act to restrict interchange fees on debit card purchases. The Credit Card Competition Act, a bipartisan piece of legislation, is now pending in the Senate and House of Representatives of the United States and seeks to reduce interchange costs for credit transactions as well.

ISVs about Payments Processing

A business that creates business management software for a specific industry is known as an independent software provider. Consider a dentist who wants to open a practice and chooses dental software to organize patient information, keep X-rays, set up appointments, and handle payments. An ISV is the business that develops and supports the software that a dentist might utilize.

ISVs can design software that controls many aspects of a business, but they frequently struggle to develop their own tools for taking payments from clients. To handle payments, they typically collaborate with a payment processor.

ISVs have two different sources of income thanks to their agreements with private companies and payment processors. They first get paid through subscriptions that are bought by the various companies who utilize their software. In addition, they receive income from a fee associated with each payment the company receives and processes using the program. However, this arrangement with the payment processors can alter.

According to Jean Boling, director of business development at payment processor Clearent, ISVs are clamouring for a larger share of the pie and greater control over the user experience. ISVs want to take greater control and profit from payments rather than contracting out the feature to processors.

In this case, “the ISV says ‘Here’s your software, click here to get your payments,'” Boling said in an interview, “when a business signs up for a piece of software.” The payment technique and established pricing structure that the ISV has implemented make things considerably simpler for enterprises.

The ISV business is still somewhat fragmented, with a large number of smaller players but no clear market leader. That’s in part because they frequently aren’t well-known because they are industry-specific. Some ISVs might be dominant in one sector, like dentistry, but lack products for other industries, like auto dealerships.