How Credit Card Processing Works: The Key Entities Involved in Processing Payments for Businesses
The act of swiping, inserting, or a tapping a credit card takes less than a minute, but there’s actually a lot going on behind the scenes whenever a business accepts a credit card as a form of payment. Learn how credit card processing works and find out which middlemen are involved.
The fact is, a number of parties come into play whenever credit card payments are involved. There’s the acquiring bank, issuing bank, the merchant service provider, and the credit card networks to name a few. And in some cases, additional middlemen — such as software integrators, membership service providers (MSP) and independent sales organizations (ISOs) — can get involved.
Every entity that’s part of this part of the payments process makes money by either taking a cut out of your sales or by earning a commission for referring you to a bank or processor. As the merchant, it’s important to be aware of these parties, so you know who you’re paying and who’s benefiting from your business.
The entities involved in payment processing: You, your customers, and everyone in between
While a transaction is essentially between the merchant (i.e., you) and your customers, there are a number middlemen that facilitate the process of accepting card payments. Below, we’ll dive into who these entities and third-parties are, and what their role is in the transaction.
Acquiring bank
Sometimes referred to as the “merchant account provider” or “merchant’s bank,” this is the bank, credit union, or financial institution that creates and maintains your merchant account (e.g., Chase, Bank of America, etc.)
A key role of the acquiring bank is to deposit the funds you earn from your credit card sales to your merchant account. The acquiring bank deducts interchange fees from the total amount processed which is then paid to the issuing bank.
Issuing bank
Also known as the cardholder’s bank, this entity is the bank or financial institution that granted the credit card account to the customer. During a transaction, the issuing bank pays the acquiring bank the sum in question.
Card networks
Sometimes referred to as card associations, these are essentially the credit card brands — Visa, Mastercard, Discover, etc.
Card networks oversee and set the interchange rates or the “swipe fees” that you pay whenever you accept a credit card. It’s important to note, though, that card networks don’t issue credit cards nor do they work directly with merchants — these jobs are handled by the issuing and acquiring banks.
We should also point out that card networks don’t earn revenue from interchange fees. Instead, credit card brands make money through assessment fees from each transaction.
How much do card networks charge in assessments? Fees will vary depending on the network and nature of the transaction, but here’s a table from Wells Fargo summarizing the assessment fees from Visa, MasterCard, American Express, and Discover.
Credit card processor
The credit card processor is a third-party company that passes along cardholder information to the card network (primarily) as well as various other parties. Credit card processors earn revenue by charging merchants such as yourself for their services.
The fees that you pay will depend on the pricing model of your payment processor. Some companies (such as Payment Depot) make money through membership fees, while others take a cut out of your sales.
Independent sales organization (ISO) and membership service providers (MSP)
ISOs and MSPs resell credit card processing services to businesses and they are usually affiliated with banks and/or processors. ISOs and MSPs help merchants accept credit cards by:
- Selling credit card processing on behalf of banks and/or processors
- Setting up payment terminals and POS systems for the merchant
- Ensure that merchants stay compliant with credit card regulations
- Provide customer support to merchants
ISOs and MSPs typically earn revenue by marking up the interchange rate set by card associations, so if you’re working with one, consider inquiring about their rates and pricing models.
Integrated software vendors (ISV)
ISVs are software providers that integrate with payment processors. ISVs and payment processors often create partnerships that incentivize ISVs to resell or recommend the payment processor to their software users.
Through these partnerships, ISVs make money from commissions and/or by earning a cut from credit card transactions.
Payment gateways
The payment gateway authorizes eCommerce transactions. Payment gateways play a crucial role when you’re selling online, as they at it securely transmits payment data to your processor. These entities make money from fees, which include network participation fees and data processing fees which are passed on to the merchant.
For obvious reasons, payment gateways are essential if you’re an online retailer. If you sell offline using a POS system, they may not be necessary.
Are you paying too much in credit card processing fees?
Now that you know the middlemen involved in credit card processing, the next step to asses the fees that you’re paying so you can find ways to save. You need to remember that when it comes to payment processing, the only fees that are non-negotiable are the interchange rates and assessments, as these are fees that are set by card networks.
Other fees — particularly the ones charged by your payment processor — may be negotiable, as these costs are the markups set by payment companies. So, take the time to review your merchant statement or proposal to identify the costs you should and you shouldn’t be paying.
Once you have a handle on those fees, negotiate with your processor or shop around to find better rates.
INFOGRAPHIC: How Credit Card Processing Normally Works
Businesses haven’t been able to get wholesale credit card processing….Until Now.
Typically, the credit card processing industry has been flooded with middlemen and salesmen marking up the wholesale cost and profiting off of the rates that small business owners have had to pay to accept cards.
We at Payment Depot have completely changed the game by offering a membership subscription that gives businesses direct access to the wholesale cost. As always, Payment Depot has no contracts, no cancellation fees, no service fees, and no hidden fees. If you’re paying more than wholesale, you’re overpaying!
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Need help figuring out your rates?
If you’re having trouble identifying the information we’ve outlined above, feel free to send us your merchant statement and our payment consultants will analyze it for you.
Quick FAQs about Credit Card Processing
Q: What is credit card processing?
Credit card processing is the method by which businesses can accept credit card payments from customers. It involves several key entities, such as the acquiring bank, issuing bank, credit card networks, and several other middlemen like software integrators, membership service providers (MSP), and independent sales organizations (ISOs).
Q: Who are the key entities involved in credit card processing?
The primary entities in credit card processing include the acquiring bank, issuing bank, credit card networks, credit card processor, independent sales organizations (ISO), membership service providers (MSP), integrated software vendors (ISV), and payment gateways.
Q: How does an acquiring bank function in credit card processing?
The acquiring bank, also known as the merchant account provider, sets up and maintains the merchant’s account. It deposits the funds earned from credit card sales into the merchant’s account and deducts interchange fees, which are paid to the issuing bank.
Q: What is the role of the issuing bank?
The issuing bank is the financial institution that grants the credit card account to the customer. During a transaction, the issuing bank pays the acquiring bank the sum involved in the transaction.
Q: What are credit card networks, and what is their function?
Credit card networks, also known as card associations, are basically the credit card brands like Visa, Mastercard, Discover, etc. They oversee and set the interchange rates or “swipe fees” that merchants pay when they accept a credit card. However, they don’t issue credit cards or work directly with merchants. These tasks are performed by the issuing and acquiring banks.
Q: What does a credit card processor do?
The credit card processor is a third-party company that passes along cardholder information to the card network and other parties involved. They earn revenue by charging merchants for their services.
Q: Who are independent sales organizations (ISO) and membership service providers (MSP)?
ISOs and MSPs are entities that resell credit card processing services to businesses. They help merchants accept credit cards by selling processing services on behalf of banks and/or processors, setting up payment terminals and POS systems for the merchant, ensuring compliance with credit card regulations, and providing customer support.
Q: What are integrated software vendors (ISV) and how do they function?
ISVs are software providers that integrate with payment processors. They often create partnerships with payment processors to incentivize them to resell or recommend the payment processor to their software users. ISVs make money from commissions and/or by earning a cut from credit card transactions.
Q: What do payment gateways do?
Payment gateways authorize eCommerce transactions. They securely transmit payment data to your processor and earn money from fees, which include network participation fees and data processing fees.
Q: Are all fees involved in credit card processing negotiable?
Not all fees are negotiable. The only non-negotiable fees in payment processing are the interchange rates and assessments, as these are set by card networks. Fees charged by your payment processor may be negotiable, as these are markups set by the payment companies.