ear New or Prospective merchant.
Credit Card Merchant: First, some definitions.
You are a new or
Your customer, the
prospective merchant who is "Cardholder", obtains his/her
excited about the opportunity to MasterCard or Visa credit card
accept credit cards as payment from a bank. The bank is called
for the goods and services you the "Issuing Bank" since it is
provide. You are probably the bank that issues the card to
thinking that this opportunity the Cardholder. (American Express
will make it easier for your and Discover work a bit
customers to pay you, open other differently, but the principles
avenues of marketing and selling in this white paper apply to
(e.g. the Internet), and protect these card types too!).
you from the hassles and risks of
You, the Credit Card Merchant,
bad checks. You are right - it obtain your "Merchant Account"
can do all of this. However, from a "Sponsoring Bank",
accepting credit cards for sometimes called an "Acquiring
payment carries with it some Bank" or "Merchant Bank". It is
responsibilities, and is not called a Sponsoring Bank because
entirely risk free to you, the the bank is sponsoring you, the
merchant. (There is no free Credit Card Merchant, as a
lunch!). This white paper is business that is qualified to
intended to provide you with some accept credit cards. Your
important information Sponsoring Bank typically uses a
regarding:
"Processor" such as ECHO to
• How the credit card system acquire the credit card
works, transactions from you and process
• Some things to watch out for, them through the bank system.
and
By giving a credit card to a
• Your responsibilities as a Cardholder, the Issuing Bank is
granting the Cardholder the corresponding "Deposit"
rights to borrow money from the transaction.
Issuing bank (up to a "Credit
If the authorization succeeds,
Limit") for the purposes of and you subsequently (or at the
purchasing goods and services same time) submit the Deposit
from a bona fide Credit Card transaction, you are informing
Merchant such as yourself.
(in effect promising) your
How are transactions Processor, your Sponsoring Bank,
processed?
and the Issuing Bank that you are
When you, as a Credit Card prepared to deliver to the
Merchant, want to accept a credit cardholder the goods and services
card for payment of your goods that are expected by the
and services, you first submit an cardholder, and that you wish to
authorization transaction to your receive payment for these goods
Processor (e.g. ECHO).
and services from the Issuing
Your Processor accesses the Bank.
Visa/MasterCard network to
Your Processor (e.g. ECHO),
communicate the authorization based on your Deposit
transaction (containing a instruction, then again works
"Transaction Amount") to the within the Visa/MasterCard
Issuing Bank to ensure that the network to request the Issuing
credit card is valid and that the Bank to deposit the "Net
Transaction Amount does not Settlement Amount" (i.e. the
exceed the Cardholder's credit "Transaction Amount" less the
limit. The authorization "Discount Amount") into your bank
transaction also puts a "hold" account at your Sponsoring
for the Transaction Amount on the Bank.
Cardholder's credit limit. That
The Discount Amount (i.e. the
way, the funds are available to Discount Rate times the
you when you submit the Transaction Amount) and other
fees, such as transaction fees,
However, this promise from the
are used to pay the various Issuing Bank does not come
entities that help you collect without some strings attached.
from the Issuing Bank. In When you submit the Deposit
particular, the Issuing Bank, the transaction, you are, in effect,
Visa/MasterCard Network, the promising the Issuing Bank that
Sponsoring Bank, and the you will deliver to the
Processor all share in dividing Cardholder the goods and services
up the Discount Rate that you promised to the
proceeds.
Cardholder.
OK, now lets talk about
In effect, the Issuing Bank's
protection. promise to pay you is only as
Who does the credit card system good as your promise to the
protect?
Issuing Bank that you will
First, it provides some deliver "expected" goods and
protection for you, the Credit services to the Cardholder. The
Card Merchant. When you sell word "expected" is important. If
goods to a Cardholder, and you you have made representations to
have received authorization for the Cardholder, leading the
the Transaction Amount from the cardholder to create
Issuing Bank, then the Issuing "expectations" in his/her mind,
Bank is promising you that after then by accepting a Credit Card
you submit the Deposit for payment, you are in effect
transaction it will deduct the promising the Issuing Bank that
Transaction Amount from the you have or will "make good" on
Cardholder's credit limit, and in those expectations.
cooperation with your Processor,
So it is a two way street. If
transfer the Net Settlement you make good on your promises to
Amount into your bank account at satisfy the Cardholder's
your Sponsoring Bank.
expectations, the Issuing Bank
will make good on its promise to expectations.
pay you the Net Settlement
Now, here is the rub. What
Amount.
happens if the Issuing Bank gets
In order to expedite your informed by the Cardholder that
payment of the Net Settlement you did not fulfill the
Amount, the entire system Cardholder's expectations?
operates on the basis of trust
Cardholder's Expectations
with you. When you submit the
Maybe the Cardholder thinks
Deposit, your Processor, your that you never delivered the
Sponsoring Bank, and the Issuing goods and services you promised
Bank all TRUST that you have or him/her.
will fulfill your commitment to
Maybe the Cardholder thinks
satisfy the Cardholder's that he/she never ordered the
expectations. The system does not goods or services that showed up
ask the Cardholder if he/she is on the Cardholder's credit card
satisfied before you get your bill from the Issuing Bank.
payment, the system TRUSTs that
Maybe the Cardholder received
you have or will (in the the goods and services, but they
immediate future) satisfy the did not meet the Cardholder's
Cardholder, and based on this expectations, so the Cardholder
TRUST, your Processor instructs wants to return the goods (if
the Issuing Bank to transfer the any) and wants his money back
Net Settlement Amount into your (e.g. a refund).
account at your Sponsoring Bank.
Well, the Issuing bank still
In fact, that is one reason why is operating on the TRUST system.
your Sponsoring Bank is called They assume that either the
"Sponsoring". The bank is cardholder is mistaken, or that
sponsoring you as a trustworthy you, as a trustworthy merchant
merchant - one that consistently have or will "make good" on your
fulfills the Cardholder's promises to the Cardholder. But
the Issuing Bank is obligated to the complaint is usually dropped
investigate the Cardholder's (but not always).
complaint.
Important!. If you do not have
To resolve a Cardholder such a "proof" document, or
complaint regarding non receipt something equivalent, or if you
of goods or services, the Issuing cannot find and deliver a copy of
Bank first (typically) sends a that document to your Processor
Retrieval Request to your in a timely fashion, then you
Processor. Your Processor (e.g. need to know that the system will
ECHO) will then forward this assume that the Cardholder is
Retrieval Request to you. The right and that you did NOT
Retrieval Request is basically deliver goods and services as you
asking you, the Credit Card promised when you submitted the
Merchant, for proof that you sold deposit transaction. When this
and delivered the disputed goods happens, several things occur.
or services to the complaining First, the Issuing Bank submits a
cardholder. This proof usually chargeback to your Processor.
consists of a document, in your Simultaneously, the
possession, that has been signed Visa/MasterCard network takes the
by the Cardholder acknowledging original Transaction Amount of
the Cardholder's receipt of the the disputed transaction out of
goods or services that were your bank account at the
charged on the credit card.
Sponsoring Bank. (Often, this is
If you can prove in a timely a deduction from the net
fashion that you delivered the settlement for your most recent
goods or services to the deposit transactions). Finally,
Cardholder, then your Processor the chargeback goes on your
will forward that information to Merchant Account Record.
the Issuing Bank, who in turn
Are chargebacks bad? The
will inform the Cardholder, and answer is YES - you need to do
everything you can to avoid them.
system starts wondering about the align="center">
TRUST it put in you. This
jeopardizes your standing as a Credit Card Merchant. If it gets type="text/javascript">
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Article Tags: bank, card, credit
