As I go into detail about the Credit Card Payment Process, I want to make sure what kind of cost component occurs.
As a card transaction happens, it basically involves cost charge based on Base Fees and Markups. Base Fees here approximately account for 75~80% with markups taking proportion of 20~25% of the card transaction rate.
Base Fees
Overview
Base Fees has a couple of different names like wholesale, pre-markup fees. It is composed of interchange fees and assessments fees as chart below.
Definition
Interchange: it is the money that the acquiring bank sends to the issuing bank for each bankcard transaction. The fee tables are established by the Card Brands like Visa, MasterCard etc. Historically, the interchange fee has been imposed upon businesses(merchants) to reimburse issuing banks for lost interest resulting from a cardholder’s grace period for repaying their debt. As a credit card processing expense which is paid to card-issuing banks. Credit card processor like First Data or Card Brands like Visa or MasterCard do not take any revenue from the interchange. It accounts for the largest portion of the whole expense.
Assessments: This is also called as card network fees or card association fees or card brand fees because the fees are paid to card brands. These fees are typically either a percentage of volume charge or a flat amount per instance.
Markups
Overview
Unlike base fees above, markups are not consistent across all businesses. Markups are the revenue that credit card processors are taking while transactions are going on.
Definition
Markups: This is all about costs and profits that must cover for all of entities that are engaged in the credit card process. Markups can be different from one processor to another by amount, pricing model and the types of fees charged. For this reason, it’s difficult to compare credit card processing transparently.
ISO/MSPs: ISO stands for “Independent Sales Organization” with MSP meaning “Member Service Provider. Each term is respectively used in Visa and MasterCard for the same meaning. An ISO/MSP is an organization with the duty of acquiring merchant contracts and supporting them on behalf of their sponsoring bank. It is not a financial institution but rather a business that provides services on behalf of a Member Bank.
Payment Processor: This is a third-party company that handles payment transactions by forwarding card information to customer’s bank as well as business’s bank to ensure there are sufficient funds on the customer’s card to process the payment and approve it.
Payment Gateway: A payment gateway is an e-commerce service that processes credit card payments for online stores. Its role is to facilitate transactions by transferring key information between payments portals like websites and by authorizing payment between merchant and customer. The most popular gateways are PayPal/Braintree, Stripe, and Square. Its tasks are including: Encryption of transaction data between gateway itself and vendor’s web server; Authorization request to issuing bank via card association;Filling an order by forwarding authorization pertaining to merchant and customer to payment gateway.
Difference between Payment Processor and Payment Gateway?
A payment processor is responsible for sending payment data from the merchant to the issuing bank and then to the acquiring bank. Traditionally, a payment processor provides a processing equipment such as credit card machines.
The main difference is that payment gateway is primarily used as a tool for e-commerce or card. It is essentially a point of sale terminal for online transactions. A payment gateway is often one of services offered by a payment processing company.
Key Players
Customer: It is commonly known as cardholder who possesses a credit card for any goods and services purchase. Me and you are also the customer and the cardholder.
Merchant: It indicates the business itself like e-commerce platform such as Amazon, Alibaba, and any other hundreds of thousands of shopping malls that are running offline and online.
Acquirer: It means acquirer bank that has a contract with a merchant. The acquirer issues the Merchant Account for merchants via the contract for them to process any payment through the provided account.
Card Network: This is a concept that you have already been familiar with if you hold a credit card with brand marks like Visa, MasterCard, America Express, Discover.
Issuer: This is a bank that issues cards to customers.
