It is a common knowledge that a business cannot call itself a truly modern one if it is unable to accept electronic payments. Some say that soon most companies will completely replace cash payment option with online transaction processing solutions. In order to keep up with this trend, emerging businesses are searching the market for the best options enabling them to smoothly process transactions at the lowest possible cost.
The key components of online transaction processing
Many people who do not have to process electronic payments on a regular basis might associate these payments with some special software, apps, or devices. A payment card or app is often the only link between the buyer and electronic banking system. The question we’d like to address here is what hides under the surface of payment experience. Any prospective merchant needs to know the answer.
The cornerstone of a company’s ability to process transactions is its acquiring bank partnership. There are some common misconceptions around the term “acquirer”. Let us try to clarify them. An acquirer or acquiring bank (mind, not just a commercial bank!) is a special entity, authorized by card networks to issue merchant accounts to applicants. A merchant account issued by an acquirer is, again, different from an ordinary commercial bank account. Your company operates through a merchant account when it comes to electronic payment processing.
When an acquiring bank underwrites you as a merchant (issues a merchant account slash merchant ID), it becomes financially liable for your business. It assumes potential financial risks associated with refunds, chargebacks, as well as merchant and consumer fraud. To protect themselves from these risks, some acquiring banks require merchants to keep certain amounts of money on their commercial accounts at all times. These amounts are called merchant services reserves. Also, acquiring banks, usually, perform quite rigorous initial merchant background verification and ongoing monitoring.
During the last decade merchant underwriting (together with respective responsibilities) was, to a large extent, delegated by acquirers to payment facilitators. In general, this trend allowed both acquirers and intermediaries to enhance payment security and distribute the risks.
The two aspects of transaction processing
Somehow, many startup merchants mostly associate payment processing with such concepts as processing center and payment gateway (and not with the acquirer). On forums you can often see questions like “how can I find a gateway to process payments in a certain geography?” However, the first thing to do would be finding an acquirer. If you find an acquiring partnership, it allows you to get hold of the regulatory aspect of becoming a merchant and online payment processing in your target industry and geography. Particular payment processor and payment gateway solution are the “technical arms” of the respective acquirer. So, they represent the technical aspect of the process.
Acquirers do not care much about who your processor or gateway provider is going to be. But processors and gateway providers will, surely, have to adapt to your acquiring partnership. In fact, many acquirers and payment facilitators already have processing and gateway solutions in place, so you don’t have to think about them yourself, once you get underwritten as a merchant. But acquiring partnership goes first!
If you get your merchant account from an independent sales organization, keep in mind, that it was originally issued by some acquirer, while the ISO just resells it. If you get underwritten as a sub-merchant by a payment facilitator (such as PayPal, Stripe, Square, or some smaller one), that operates through a single “master merchant” account, keep in mind that any PayFac, in its turn, gets underwritten by an acquirer anyway. An acquiring bank always stands closer to the top of the hierarchy, or to the center of the web, than any intermediaries.
Presently, it is much easier to get underwritten as a merchant than it was, say, ten years ago. Applicants are often underwritten online, almost instantaneously, and they can start processing transactions almost in no time. But acquiring banks still provide the backbone of the whole merchant services industry.