Understanding the Payment Players

Understanding the Payment Players - Fraud Library
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Each of the players in the payment process has a role to fulfill. They are performing these roles to make money. Understanding this will help you in working with them. In this section we will discuss each of the major players in terms of what their role is, which other players they associate or represent and how they make money.
There are seven major players in the payment process: consumers, merchants, issuing banks, acquiring banks, payment processors, gateway services and card associations.
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Understanding the payment players: Associations, Banks, Payment Processors, Gateways, Merchants and Consumers
Consumers & Merchants
Let’s start with two everyone is familiar with, the “consumer” and “merchant.” The consumer is an individual or organization that has the intent of making a purchase. They have money or credit and they desire goods and services. The merchant is the one with the goods and services and is looking to sell them to consumers.
Now the consumer can be motivated to select a particular merchant by several things: price, service, selection or preference. But the merchant’s main motivation is to make money. The merchant is in business to make money and they do so by selling the goods or services for more money than they bought them. This money between what they bought it for and what they sold it for is called their margin.
There are a lot of different ways to exchange money for services, bartering, cash, checks, debit cards, installment payments or credit cards. Our focus is on credit cards and with credit cards, the consumer and the merchant both have banks that they are working with that manage the credit card payment transactions.
Issuing Bank
The consumer got his credit card from a bank or credit union, called the “issuing bank.” Sometimes you may hear an issuing bank being called an “issuer,” which means the same thing. The issuing bank is not just associated with major credit card brands such as American Express, MasterCard and Visa, but also with credit cards called “private label credit cards.” These are the ones that department stores or shops offer, such as Sears and Target cards.
Issuing banks are lending institutions that work behind these credit cards to grant and manage the extended credit. Some examples of these are Bank of America, Citibank, MBNA, Household Financial, GE and Wells Fargo.
The purpose of the issuing bank is to grant credit directly to a consumer. They are the ones that have a consumer fill out an application, check a consumer’s credit history and maintain their account. The issuing bank is the one that decides what a consumer’s credit limit is, based on credit history and current debt load. There are literally thousands of issuing banks in the United States — any bank or credit union you see on the corner could be an issuer. In Canada and the United Kingdom there are far fewer banks, so the number of issuing banks is much smaller.
What motivates the issuing bank? They are in it for the money as well. They make money on the interest the consumer pays on outstanding balances from previous purchases, and they get a part of every purchase a consumer makes with the card from a merchant.
Acquiring Bank
The acquiring bank represents the merchant. They process all of the merchant’s credit card payments with the associations (American Express , MasterCard, Visa..), and provide the merchant with reconciliation tools. The acquiring bank makes money on every transaction a merchant processes.
There are number of acquiring banks in the United States and abroad, and merchants are free to move from one acquirer to another. Merchants typically select their acquiring bank based on the amount of money, called basis points, they charge per transaction.
Payment Processors & Gateway Services
There is nothing stopping a merchant from directly connecting to their acquiring bank, but there are a number of reasons why they may not want, or be able, to. There are technical and business requirements in conducting the payment process for credit cards, and most merchants don’t want to have to worry about these requirements. Instead they choose to use a third party between them and their acquiring banks. These third parties are called payment processors and gateway services.
Payment processors offer the physical infrastructure for the merchant to communicate with the acquiring banks and the associations. They are the ones that connect everyone together. This allows some very small banks to offer merchant services that they could not provide on their own. Payment processors make their money by charging a flat transaction fee or by charging basis points to the merchant. Some payment processors also provide acquiring bank services directly.
Gateway services offer merchants physical infrastructure as well. They typically offer technology and integration services that are faster, easier and less expensive to get started. They also give the merchant the freedom to move between acquiring banks so they can negotiate better rates without having to make changes to their production systems. The gateway service provider will charge a transaction fee or basis points for their services. These fees are on top of the payment processor fees the merchant is already paying.
If a merchant decides to use a gateway service provider they will still have to set up accounts with an acquirer. The acquirer could be an acquiring bank or a payment processor that offers acquiring.
Card Associations
Finally there are card associations, such as Visa , MasterCard International, American Express and Discover. There are a lot more — this is just a sampling. The card associations are responsible for setting up the guidelines on how transactions, services and disputes are to be handled. They interface with national banking laws and provide the money that covers some of the fraud that occurs within the membership. Each association runs a little differently, so one size does not fit all.
Visa has regions that operate pretty much autonomously. There is Visa U.S.A., Visa Europe, Visa Asia, etc. Each of these regions may have slightly different rules, tools and services they offer. Visa does not actually issue credit cards to consumers; they use issuing banks to issue credit cards that are branded as “Visa.”
MasterCard International is a little different from Visa in that it is one association for the entire globe: all regions go into the same structure. This has some benefits when it comes to regulations and tools. MasterCard International also uses issuing banks to issue credit cards to consumers that are branded as “MasterCard.”
American Express differs even more by acting as the issuer for all American Express branded credit cards. American Express is one global organization with regional coverage. American Express also differs from Visa and MasterCard in allowing merchants to set up direct connections for performing the acquiring functions.
One of the side notes that should be understood is the concept of “co-branding.” Today consumers have credit cards that are being sponsored by airlines, car companies, local clubs, etc. These organizations get a little of the money for each purchase. In some cases it may be that the organization is actually the Issuer, but in a lot of cases it is an actual issuing bank that is offering a number of co-branded credit cards for consumers to choose from. The card is still an American Express, Visa or MasterCard.
Each of these credit card associations has their own network of systems, policies for use and payment processing. Each of these associations develops new fraud-prevention tools and tries to get merchants to adopt them. These fraud-prevention practices are only good for that type of card. Usually if good market adoption occurs, the other cards will adopt a similar technology.
The actual fraud programs and services an association offers changes often, and you should check out their websites often to learn more about the types of fraud-prevention services and solutions they are endorsing.
Conclusion
Aside from the consumers, all of the players we have discussed rely on consumers to make purchases; because they make their money each time the consumer makes a purchase. For each consumer purchase the merchant is trying to make profit from a percentage of money called their margin, which represents the difference between what it cost them to buy and sell the goods and what they sold it for to the consumer.
In that margin the merchant has to pay for all of their overhead, staff, utilities, property, loss, insurance etc.… Profit comes from the margin and the merchant needs that margin to go a long way before they actually make profit, so every penny of it counts.
There is no denying that a merchant makes less profit on an order paid by credit card than by cash. But all merchants understand that having the ability to take credit cards means there are a lot more potential sales that would have never been possible as strictly cash deals. The merchant’s additional costs for credit card transactions come from interchange rates and basis points.
The issuing banks, acquiring banks, associations, and sometimes the payment processors, all get their money from the merchant in terms of basis points paid by the merchant. Basis points are percentage points of a sale a merchant pays on every purchase made with a credit card to the acquiring bank. Merchantsnegotiate with their acquiring banks, and sometimes the associations, to get the best possible interchange rates and basis points. The key point to understand is all of the players, aside from the consumer, have a vested interest in each consumer purchase.
Another key take-away from this section is to really understand that fraud is not defined or felt the same by all players in the payment process. Consumersworry about identity theft and having to rebuild their credit, while merchants worry about losing goods and having to pay fines. Acquiring banks worry about collusive merchants working with fraudsters to defraud the banks. Issuers worry about fraudulent applications, counterfeit cards and stolen cards. Associations worry about how fraud will impact their brand name to consumers, merchants and banks. So when talking, reading or evaluating fraud-prevention techniques remember to check whose perspective you are getting.