Surprising as it may sound participants and flow somewhat changes depending on credit card association. While Visa and MasterCard use open-loop networks to connect between issuing banks and acquiring banks, American Express and Discover use closed-loop systems, as issuing bank, merchant bank and association are in fact one in the same.
The associations develop, maintain, monitor and regulate the networks that enable: authorization, capture, refund and chargeback data and money transactions. Issuing banks and acquiring banks are members of the associations, to which they pay fees for the smooth operation of the network.
Issuing banks issue individuals credit cards and take full responsibility on a person’s ability to fulfill a financial obligation. When a transaction is “Authorized” by an issuing bank, same bank will have to fund the transaction regardless if it is able to collect authorized funds from cardholder or not. This fundamental obligation is the basis on which the credit card processing flow is based. It is the reason merchants are willing to accept credit cards and also explains why majority of fees end up being paid to the issuing banks.
Acquiring banks take the commercial risk of merchants going out of business which means they have to fund all chargeback transactions they can’t collect from a merchant. This is why acquiring banks are picky accepting a merchant, split the market and relate to merchants according to pre-set risk categories and set mechanisms, such as “rolling reserve”, to ensure at least a partial recovery of a potential loss.
Payment processors grew into the ‘operating arm’ of the acquiring banks, providing merchants with both technological and financial infrastructure needed to operate the merchant’s site.
Gidi Argov, Founder and CEO
www.CreditCardProcessing-r-us.com
