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Merchant account

From Wikipedia, the free encyclopedia

A merchant account is a type of bank account that allows a business (known as a merchant) to accept payments by 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.[1] In some cases, a payment processor, payment service provider, independent sales organization (ISO), or member service provider (MSP) acts as an intermediary between the merchant and the acquiring bank.[2]

Whether a merchant enters into an 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 (such as Visa, Mastercard, Discover Card, and American Express).[3]

A high-risk merchant account is a specialized merchant account for businesses deemed to carry a higher financial or legal risk by acquiring banks and payment processors.[4] These accounts typically incur higher transaction fees, larger rolling reserves, or stricter settlement terms. Industries operating under high-risk merchant accounts include the adult industry, online travel agencies, foreign exchange (forex) trading, gambling, and multi-level marketing.[5]

History

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Following the development of credit cards in the 1960s, early merchant processing relied on manual processing methods. Merchants used mechanical credit card imprinters (often called "zip-zap machines") to transfer embossed card details onto two-part carbon paper forms.[6] These paper credit card slips were submitted by mail or deposited in person at a merchant acquiring bank.

By the late 1970s and 1980s, these manual techniques were supplemented by Automated Response Units (ARU) over landline telephone connections and later replaced by electronic point-of-sale terminals capable of reading the magnetic stripe on payment cards.[7]

Methods of processing credit cards

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Credit and debit card transactions are transmitted electronically to acquiring banks or payment service providers for authorization, capture, and settlement. Information is captured via physical card reads—including magnetic stripe swipes, EMV chip insertions, or near field communication (NFC) contactless taps—or manually keyed via e-commerce checkouts and virtual terminals.[8]

Credit card terminal

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A legacy credit card terminal from the mid-2000s.

A credit card terminal is a standalone electronic device that enables merchants to process card payments. Modern terminals read EMV chips and NFC interfaces, generate digital or printed receipts, and communicate with processing networks via Ethernet, Wi-Fi, or cellular connections.[9]

Automated response unit

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An Automated Response Unit (ARU) or voice authorization system allows merchants to perform manual keyed authorizations over a telephone network. This method is predominantly used as a backup when electronic point-of-sale networks experience outages or for low-volume remote transactions.[10]

Payment gateway

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A payment gateway is an e-commerce application service that authorizes card payments for online businesses, multi-channel retailers, and digital platforms. It functions as the virtual equivalent of a physical point-of-sale terminal.[11] Payment gateways connect directly to website shopping carts via APIs or provide hosted checkout environments and virtual terminals for manual entry.[12]

Level 2 and Level 3 processing

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For business-to-business (B2B) and business-to-government (B2G) transactions, card networks offer reduced interchange fee rates for corporate and purchasing cards if additional invoice details are submitted during authorization and settlement.[13]

Processing tiers are divided based on data granularity:

  • Level 1: Standard consumer transactions containing basic payment data (amount, date, merchant name).
  • Level 2: Requires standard data plus sales tax amount, customer code, and merchant postal code.
  • Level 3: Requires comprehensive line-item invoice data, including item descriptions, quantities, unit costs, freight charges, product codes, and tax identification numbers.[14]

In exchange for transmitting Level 2 or Level 3 data, card schemes grant lower interchange rates to lower processing risks for commercial purchasing cards.[15]

Merchant account marketing

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Merchant accounts are marketed directly by acquiring banks or through registered third-party entities acting as sales channels.[16]

Marketing by banks

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A bank that maintains a direct card processing relationship with Visa and Mastercard is known as a member bank or acquiring bank. Some member banks underwrite and issue merchant accounts directly through internal sales divisions. To manage exposure to fraud and credit default, banks may impose geographic or operational requirements on prospective merchants.[17]

Marketing by independent sales organizations

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Independent Sales Organizations (ISO), also known as Member Service Providers (MSP), are third-party companies registered by member banks to market, underwrite, or service merchant accounts.[18] Card network regulations require ISO/MSPs to undergo financial background checks and pay annual registration fees.

Under card association operating rules, ISO/MSPs must prominently disclose their sponsoring member bank on all marketing collateral and digital channels (e.g., "[Company Name] is a registered ISO of [Bank Name], [City, State]"). Failure to display compliant disclosure statements can incur financial penalties from the card schemes.[18]

Rates and fees

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Merchant processing costs comprise interchange fees set by card networks, network assessment fees, and acquirer service margins.[19]

Pricing models

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Three-tier pricing

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Three-tier pricing categorizes card transactions into three distinct pricing tiers based on criteria established by the processor:

  • Qualified rate: The lowest percentage rate charged for standard consumer credit cards processed through compliant methods (e.g., swiped or dipped physical cards).
  • Mid-qualified rate: A higher rate applied to transactions that do not meet standard qualified criteria, such as key-entered cards or rewards/loyalty cards.
  • Non-qualified rate: The highest rate charged on transactions carrying higher interchange costs or operational risks, such as corporate cards, international cards, or transactions settled past standard batch windows (typically 24–48 hours).[20]

Six-tier pricing

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Six-tier pricing expands three-tier structures by separating PIN-based and signature debit card transactions from credit card tiers, allowing processors to pass lower debit interchange rates directly to merchants.[21]

Interchange-plus pricing

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Interchange-plus (or pass-through) pricing separates the wholesale interchange fees established by Visa and Mastercard from the processor's markup. The processor charges the exact wholesale interchange rate plus a fixed percentage fee and per-transaction fee (e.g., Interchange + 0.20% + $0.10). This model is widely considered the most transparent pricing structure.[22]

Fee structures

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  • Authorization fee: Charged for every authorization request transmitted to the card-issuing bank, regardless of whether the transaction is approved or declined.
  • Transaction fee: Charged upon successful settlement of an authorized transaction.
  • Monthly statement fee: An administrative fee for account maintenance and monthly statement delivery.
  • Monthly minimum fee: A threshold fee charged if a merchant's cumulative processing fees do not meet an agreed monthly minimum.
  • Batch fee: Charged when a merchant settles (batches) daily transactions with the acquiring bank.
  • PCI compliance fee: Charged to maintain and verify compliance with the Payment Card Industry Data Security Standard (PCI DSS).
  • Early termination fee: Assessed if a merchant cancels a service agreement prior to the expiration of the contract term.
  • Chargeback fee: Assessed when a cardholder successfully disputes a transaction, resulting in a reversal of funds. Card schemes require merchants to maintain chargeback ratios below specific thresholds (typically 0.9% to 1.0% of total volume).[23]

Regulation and interchange caps

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Interchange fees and merchant card acceptance rules are subject to statutory regulation in several international jurisdictions to limit merchant processing costs.[24]

United States

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In the United States, the Durbin Amendment (enacted as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010) directed the Federal Reserve to establish caps on debit card interchange fees for covered issuing banks with total assets exceeding $10 billion.[25] Effective October 1, 2011, the Federal Reserve capped debit card interchange fees for covered issuers at 21 cents per transaction plus 0.05% of the transaction value, with an additional 1-cent allowance for qualifying fraud-prevention policies.[26]

European Union

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In the European Union, Regulation (EU) 2015/751 (the Interchange Fee Regulation) introduced statutory caps on interchange fees for consumer payment cards.[27] Effective December 2015, interchange fees for consumer debit card transactions were capped at 0.2% of the transaction value, while consumer credit card interchange fees were capped at 0.3%.[28]

See also

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References

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  1. ↑ Trelewicz, J. Q. (2003). E-Commerce Payment Systems. Artech House. pp. 45–48. ISBN 978-1580532686.
  2. ↑ "Merchant Assessment and Underwriting". Mastercard. Retrieved March 15, 2024.
  3. ↑ "Visa Core Rules and Visa Product and Service Rules" (PDF). Visa Inc. 2023. Retrieved March 15, 2024.
  4. ↑ Chou, Y. (2015). High-Risk E-Commerce and Payment Processing. Academic Press. pp. 112–115. ISBN 978-0128012345.
  5. ↑ Naimi, A. (2018). "Risk Classification in Payment Acquiring Systems". Journal of Financial Crime. 25 (2): 341–355. doi:10.1108/JFC-04-2017-0031.
  6. ↑ Mandell, Lewis (1990). The Credit Card Industry: A History. Twayne Publishers. pp. 72–75. ISBN 978-0805797886.
  7. ↑ Stearns, David L. (2011). "Electronic Value Exchange: Origins of the VISA Electronic Payment System". Springer Series in History of Computing: 120–125. doi:10.1007/978-1-84996-139-4.
  8. ↑ "Payment Card Industry (PCI) Data Security Standard". PCI Security Standards Council. Retrieved March 15, 2024.
  9. ↑ Raju, J. (2019). Point of Sale Technology and Payment Infrastructure. Springer. pp. 88–92. ISBN 978-3-030-12345-1.
  10. ↑ Suman, A. (2012). Merchant Services and Card Acquiring. Financial Times Press. p. 143.
  11. ↑ Turban, E.; King, D. (2017). Electronic Commerce 2018: A Managerial and Social Networks Perspective. Springer. pp. 512–515. ISBN 978-3319587158.
  12. ↑ Li, S. (2020). "Security Standards and Gateway Architectures in E-Commerce". International Journal of Information Management. 50: 110–122. doi:10.1016/j.ijinfomgt.2019.05.012.
  13. ↑ "Corporate and Purchasing Card Processing Guidelines" (PDF). Visa Inc. 2023. Retrieved March 15, 2024.
  14. ↑ Schneider, G. (2016). Electronic Commerce (12th ed.). Cengage Learning. pp. 430–432. ISBN 978-1305867819.
  15. ↑ "Mastercard Interchange Rates and Criteria". Mastercard. 2023. Retrieved March 15, 2024.
  16. ↑ Plouffe, C. R. (2008). Navigating the Payment Card Ecosystem. Harvard Business Press. pp. 65–70.
  17. ↑ Reiss, D. (2014). Bank Risk Management in Payment Systems. Palgrave Macmillan. pp. 201–205. ISBN 978-1-137-38902-2.
  18. 1 2 "Visa Core Rules and Visa Product and Service Rules" (PDF). Visa Inc. 2023. Retrieved March 15, 2024.
  19. ↑ Rochet, J. C.; Tirole, J. (2002). "Cooperation among Competitors: Some Economics of Payment Card Associations". RAND Journal of Economics. 33 (4): 549–570. JSTOR 3087474.
  20. ↑ Wright, J. (2012). The Economics of Payment Card Networks. MIT Press. pp. 110–114.
  21. ↑ Federal Reserve Board (2021). Report to Congress on Government-Administered General-Use Prepaid Cards (Report). Board of Governors of the Federal Reserve System.
  22. ↑ Evans, D. S. (2011). "The Economics of Payment Card Fee Systems". Journal of Competition Law & Economics. 7 (1): 1–24. doi:10.1093/joclec/nhq028.
  23. ↑ "Chargeback Management Guidelines for Visa Merchants" (PDF). Visa Inc. 2021. Retrieved March 15, 2024.
  24. ↑ Bradford, T. (2018). "The Evolution of Payment Card Regulation Internationally". Federal Reserve Bank of Kansas City Economic Review. 103: 45–68.
  25. ↑ "Regulation II (Debit Card Interchange Fees and Routing)". Board of Governors of the Federal Reserve System. Retrieved March 15, 2024.
  26. ↑ Hayashi, F. (2013). "The Durbin Amendment's Effects on Merchants and Consumers". Federal Reserve Bank of Kansas City Economic Review. 98 (3): 5–32.
  27. ↑ "Regulation (EU) 2015/751 on interchange fees for card-based payment transactions". EUR-Lex. April 29, 2015. Retrieved March 15, 2024.
  28. ↑ "Interchange Fee Regulation". European Commission. Retrieved March 15, 2024.
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