Merchant Processing Pointers

This article submit by How To Accept Credit Cards Online.


The merchant processing world is tough to ignore if banks want to please their business customers. There’s also the potential for revenues: combined MasterCard and Visa annual transaction volume topped $1.5 trillion in 2004.

There are three types of merchant processors, according to the Office of the Comptroller of the Currency-acquiring banks, agent banks with and without liability, and third-party organizations.
A bank that contracts with merchants for settlement of credit card transactions is an acquiring bank, according to the OCC. Agent banks contract with merchants on behalf of an acquiring bank. Agent banks that only refer banks to participate in an acquiring bank’s program are known as referral banks, which typically do not assume liability for merchant losses.

Community banks usually function as agent banks that do not directly offer merchant processing services to their customers. Third-party organizations include any company the acquiring bank contracts with to provide merchant processing services, according to the OCC.

“Merchant processing activities involve gathering sales information from the merchant, obtaining authorization for the transaction, collecting funds from the card-issuing bank, and reimbursing the merchant,” said the OCC in its December 2001 Merchant Processing: Comptroller’s Handbook.

Some vendors do acquiring and processing, such as First Data Corp., while others, such as Certegy, only do processing.

The merchant acquiring business is concentrated: the top eight merchant acquirers hold 94 percent of the market share in terms of volume, according to The Nilson Report. First Data Corp., including alliances with Chase Merchant Services and Paymentech, controls 50 percent of all MasterCard and Visa transactions.

Other vendors include InfiCorp Holdings, Nova Information Systems, Global Payments. Elan Financial Sen-ices, and Vital Processing. These all offer merchant acquiring services for community banks. Core processors are teaming up with payment vendors to offer banks one-stop shopping. Fiserv Inc. is working with Primax Payment Systems, a credit and debit card transaction processor.

Banks can keep costs down by doing more of the work in-house, with a vendor handling only the processing. Yet, this entails assuming liability and hiring the talent to manage it. Here, the bank has the responsibility to sell services and set up its own pricing scale. The bank retains loss liability for the merchant.

Generally, community banks are better off paying a higher price and shifting liability to a provider, vendors advised. Banks should also make sure their brand is used front and center by the merchant processor.

“Make sure you can align with a partner that can put your name in front of your clients,” said Jan Estep, executive vice president of Elan Financial Services.

When evaluating a merchant acquiring vendor, banks must also make sure they’re working with a secure provider.

“Exposure of cardholder information is a risk area at a merchant processor,” Estep said. “Banks need to partner with a vendor that is totally tied up relative to risk management, regulations and cardholder compliance. All those are things that might put your financial institution at risk,” Estep said.

From a security standpoint, banks need to make sure the merchant processor is properly certified for the MasterCard or Visa network they will use to clear transactions, said Patricia Hewitt, vice president of business development for Fiserv Credit Processing Services. Be sure to ask for standard audits to ensure the processor is financially stable.

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