Regards,

I have very concise question and would like to finally find out:

1. What exactly are merchant accounts ?
2. What is difference between CC processors and merchant accounts ?
3. Does anyone knows how much is basic fee of VISA company for processing of one transaction? When I say basic, I mean how much they charge to merchant account providers etc.

Thanks very much for your kind answers.

A merchant account allows you to accept credit cards: A special bank account used to receive the proceeds of credit card transactions. The merchant bank is responsible for debiting the funds from the customer and depositing them into the merchant account.

Basically, a merchant account consists of the acquiring bank, the CC processor and electroni gateway.

As far as charges - it depends on where you are located and how much you process a month. Merchants who process a large amount (100K, etc) a month get discounts because of their volume.

To add to what Corey has mentioned above, the definition of a "credit card processor" sometimes varies. Some use the term to strictly speak of an acquiring bank or ISO, others use it to mean anyone involved in the acquiring process.

Here is a break down on how it all works.

At the top of the pyramid, you have Member Banks that are part of the Visa and MasterCard Card Associations.

Some banks are Issuing Banks - which means they issue credit cards to cardholders. In return for taking the risk that the cardholder may not pay their bill, they receive Interchange fees on all sales processed along with interest that they collect.

Other banks are Acquiring Banks - which means that they acquire transactions on behalf of their merchants. Acquiring banks take the risk that a merchant will incur chargebacks that are unpaid, and in such a case the acquirer is left holding the bill.

That being said, it is important to realize that a bank's primary business is in making loans. That is how money is created and that is the main source of profits for most banks.

Thus, in order to spread out their risk and in order to tap into markets that require a level of sophistication that they are unwilling to devote their resources too, many banks work with ISO/MSP's to develop the merchant acquiring side of their business.

An ISO/MSP is a credit card processing business that is registered with Visa, MasterCard and a sponsoring Member Bank. An ISO/MSP is subject to a detailed financial investigation and due diligence prior to being allowed to represent one or more banks.

Acquirers - whether a bank or ISO - setup merchant accounts. A merchant account is an individual merchant ID (MID) designated for a specific business that authorizes it to accept and process credit card sales.

During the transaction process - money flows from the Issuing Bank to the Acquiring Bank and then into the merchant's local bank account.

In terms of the cost of a given transaction - this is a very complicated subject. The reason why is that Visa and MasterCard have different Interchange costs for all kinds of different sub-types of credit cards, methods of sale, etc. All in all, there are literally -dozens- of different categories and costs that a given sale can fall into.

This is why most merchant accounts clump together transactions into two or three billing categories for simplicity. These are typically labeled as "qualified", "mid-qualified" and "non-qualified."

In addition to the Interchange costs, there are also Visa/MC dues and assessments. These are the fees paid to Visa/MC by their Member Bank which generates profit for them.

Then - on top of the above costs... you also have BIN sponsorship costs, reporting and/or account-on-file costs and the network costs for the authorization & settlement network(s) used for transactions.

After you finish adding those up, you need to also account for the cost of properly supporting the merchants in a portfolio. Proper customer service requires an acquirer to maintain a reasonable ratio of merchants to staff and investments are always needed to keep things working smoothly as the account base grows.

And finally... beyond the hard costs above, you also need to account for the inevitable losses that will occur on a given portfolio.

So you need to factor in enough of a risk premium that will cover the accounts that reject out due to NSF or which turn out to be fraud or which end up causing losses due to chargebacks.

Add all of that together and you have a basis for the cost behind merchant processing. The core cost from Visa and MasterCard on a given transaction are only one piece of it.

Thanks for your answer Corey and Cdg :)

But I am still confused with this. I don't know why some of the companies on the net are offering merchant account, other offer only cc processing. I thought merchant account is the thing that is enough, but there is always some weird terms on the sites.

Also I found that some companies can provide you with getaway with CC processing service, but you need to open your own merchant account in your bank. Also, they offer that if you open checking account they will automatically transfer funds on your checking account. Can someone explain me the process in nutshell, how it works with USA checking accounts. I am not from USA, so that's why I am confused.
How can they proceed the funds directly to my checking account if I am out of USA, when I know that one of the ways to transfer money is WIRE transfer and it cost a lot of money, and also is very time consuming. And here they are offering like immediate transfer with no waiting period.

If someone ask me now to say the difference between CC processing companies, and merchant account issuer companies, I couldn't tell, I am still confused with it.

Can someone try to explain what is the process and how lets say 2checkout works, and on the other hand, how works authorize.net. Are this two companies offer same type of service or not?
What is the difference?!

I think this question could be very beneficial to all users of e-commerce so I beg for trough-out approach to answer.
From my side it would be highly appreciated.

Thanks allot,

Dragan

Well as Chris pointed out, the CC processor term varies. I gave you what I think my definition is. :) If you have some specific links, that might help us to explain it a little bit better.

2Checkout.com is somewhat of a third party processor, but I think they use consignment to get away from calling themselves a third party processor & not to bring any more attention to themselves. In essence though, 2CO has the merchant account & allows you to use it to accept CC.

Authorizenet.com is only an electronic payment gateway, like LinkPoint and Verisign. Think of a gateway as the same as a POS terminal in the grocery store, it provides the virtual way of verifying the CC.

Since you are not in the US, this might be why it is more confusing. I have noticed a lot of companies not in the US use different terminology.

Moved to E-Commerce Discussion