In order to compete in today's global marketplace, it is essential that businesses large and small accept credit and debit cards from their customers. Credit and debit card usage continues to rise; if you don't want your customer going to one of your competitors, you must accept plastic. You need to establish a merchant account. Plenty of providers offer these processing services, but not all of them will share in your company's vision. In this guide, author Michael Mintz provides advice and information about handling a merchant account. It answers these vital questions: How does the credit and debit card process work? What is interchange, and why do I care about it? Who makes what on each transaction? What are the pricing strategies and additional fees? How do I read my month-end statement? Why should I worry about PCI compliance? What does the Durbin Amendment mean to me? What should I know about American Express? You're a Business Owner, Not a Dummy provides an insider's look at the sometimes complex system of merchant accounts and provides a wealth of information to help you make the right decision for your business.
You're a Business Owner, NOT A DUMMY!
Understand Your Merchant AccountBy Michael MintziUniverse, Inc.
Copyright © 2012 Michael Mintz
All right reserved.ISBN: 978-1-4759-2224-0 Contents
Introduction...........................................................................ixChapter 1 How Does the Credit and Debit Card Process Work?.............................1Chapter 2 What Is Interchange, and Why Do You Care about It?...........................22Chapter 3 Who Makes What on Each Transaction?..........................................29Chapter 4 Pricing Strategies and Additional Fees: The Real Truth.......................37Chapter 5 My Month-End Statement Makes No Sense—Please Help!.....................56Chapter 6 PCI Compliance: Why Do You Care?.............................................86Chapter 7 The Durbin Amendment: What Does It Mean to You?..............................90Chapter 8 A Checklist to Use Before You Make a Decision................................93Chapter 9 American Express.............................................................96Epilogue...............................................................................99Index..................................................................................101
Chapter One
How Does the Credit and Debit Card Process Work?
This chapter will discuss
• key industry terms;
• the different ways merchants accept credit and debit card payments;
• who all the players are; and
• the step-by-step electronic payment process.
The first step to understanding the world of merchant processing is to become more familiar with the industry lingo.
Key Industry Terms
ABA Routing Number
The American Banking Association (ABA) routing number is a unique, bank-identifying number that directs electronic ACH deposits to the proper bank. The number consists of nine digits and precedes the account number printed at the bottom of a check.
Acquiring Bank or Acquirer
The banking institution that provides its clients with the ability to accept electronic forms of payment. An acquiring bank teams with a processor to set up a merchant account for a client.
Address Verification Service (AVS)
A service that verifies the cardholder's billing address. Utilizing an AVS is applicable to certain types of businesses (mail order, telephone order, or Internet-based) in order to help combat fraud in card-not-present transactions.
Adjustment
When a correction to a transaction is required, this is handled by making an adjustment.
American Express
A financial organization that issues credit cards and acquires transactions, unlike Visa and MasterCard, which are bank associations.
Annual Fee
A fee charged by some merchant services providers on an annual basis. Annual fees are sometimes referred to as membership fees.
Application Fee
A one-time fee charged by merchant services providers that covers the cost of merchant account underwriting, approval, and setup.
Approval
The process by which a transaction is approved by an issuing bank. Approvals are requested via an authorization, which ensures the cardholder has the appropriate credit limit or bank account balance to honor his or her financial obligation.
Assessments
Assessments are the portion of interchange fees charged by Visa, MasterCard, and Discover. As of October 1, 2011, assessments are 0.11 percent for Visa and MasterCard and 0.10 percent for Discover, calculated on the dollar amount of the transaction.
Authorization
An authorization is a request made by the merchant to charge a cardholder. The authorization must be settled (see batch settlement) in order to charge the actual credit or debit account. If batch settlement does not occur within a specified time frame, the charge will drop off and not be funded; the customer will not be charged; and the merchant will not be paid.
Authorization Code
The numeric or alphanumeric code provided by the issuing bank that references the transaction for internal and external reporting purposes.
Authorization Response
The response provided by the issuing bank to the acquiring bank and ultimately to the merchant when an authorization is initiated. Responses include approval, decline, and referral.
Automated Clearing House (ACH)
The automated clearing house network is a nationwide, wholesale electronic payment and collection system. It is a method of transferring funds between banks via the Federal Reserve System.
Automatic Bill Payment
An agreement between a merchant and a cardholder allowing recurring, periodic billing using a credit or debit card for goods or services rendered (for example, when a patient goes to the dentist and promises to pay off his $1,200 bill in twelve equal $100 installments that will occur on the first day of each month for twelve months). This is also called recurring billing.
Average Ticket (Average Transaction Amount)
The average dollar amount of a merchant's credit and debit card transactions calculated by dividing the total dollar volume of monthly transactions by the total number of monthly transactions.
Basis Point
A basis point is equal to one one-hundredth of a percentage point. Discount rates are expressed in basis points.
1 Basis Point = 0.01% and 100 Basis Points = 1.00%
Batch
A collection of transactions submitted for settlement. It is good business practice to run a batch once a day.
Batch Settlement
The process by which a merchant submits all transactions that occur throughout the day to its acquiring bank for settlement and deposit into its business bank account.
Capture
The process of capturing funds from an authorization. The acquiring bank captures funds from the issuing bank on behalf of its client (the merchant).
Card Associations
A network of issuing banks and acquiring banks that process payment cards of a specific brand. Familiar payment card association brands include Visa, MasterCard, and Discover.
Card-Not-Present (CNP) Transactions
When the cardholder and the card are not physically present at the time the transaction occurs. Typical card-not-present transactions take place in industries focused on business-to-business, mail order, telephone order, and Internet-based transactions.
Card-Present Transactions
When the cardholder and the card are physically present at the time the transaction occurs. Card-present transactions account for the majority of credit and debit card transactions in the world. Also called swiped transactions.
Card Verification Value Code (CVV)
The card verification value code is used to help authenticate a customer's credit or debit card in card-not-present transactions. For Visa (CVV2) and MasterCard (CVC2), the code will be the last three digits printed on the back of the card. For American Express (CID), the code will be the four-digit number on the front of the card above the account number.
Chargeback
The process by which funds that have been paid to a merchant are taken back because of a disputed or improper transaction. A chargeback is typically initiated by the consumer/cardholder. Merchants are often assessed a fee for each chargeback regardless of the ultimate outcome.
Commercial, Corporate, or Business...
