A Merchant’s Guide to Banks, Payment Providers, and Card Networks

By Whitney Troxel

Payment processing plays a vital role in today’s digital economy. As a merchant in the modern marketplace, it’s essential to understand the different financial services you have access to. Whether you’re a small business owner just starting out or an experienced executive looking for new payment methods, being informed about banks, payment providers and card networks is vital to make sure your business runs smoothly and efficiently.

In this article, we’ll take a closer look at the transaction process and the key players involved. So, whether you’re an online merchant or have a brick-and-mortar store, let’s unravel the mysteries of payment processing together!

Understanding the Payment Chain

The first thing to understand about payment processing is how it works. When a customer uses a credit or debit card to make a purchase, the transaction goes through a series of steps involving multiple parties before the transaction is complete.

1. Customer Initiates Payment — The customer presents their payment card, whether it’s a credit card or a debit card, to the merchant for payment.
2. Merchant Requests Payment — The merchant uses a payment provider or payment gateway to securely transmit the payment information, such as the card number and transaction total, to the acquiring bank.
3. Acquiring Bank Authorization — The acquiring bank, also known as the merchant’s bank, receives the payment request and forwards it to the appropriate card network (such as Visa or Mastercard) for authorization.
4. Issuing Bank Verification — The card network routes the payment request to the issuing bank, which issued the credit or debit card to the customer. The issuing bank verifies the transaction, checking factors such as available credit or funds and the cardholder’s account status.
5. Authorization Response — The issuing bank sends an authorization response through the card network to the acquiring bank, indicating whether the transaction is approved or declined.
6. Merchant Fulfillment — If the transaction is approved, the merchant fulfills the customer’s order, confident that payment will be processed successfully.
7. Funds Transfer — The acquiring bank facilitates the transfer of funds from the customer’s issuing bank to the merchant’s account. This transfer typically occurs within a few business days.

These steps are the same for both in-person and online transactions and happen within a matter of seconds. But why are so many different organizations involved in a single transaction? Let’s take a closer look at the payment providers, banks, and card networks that all play a role in this complex process.

The Roles of Banks and Payment Processors

In the United States, bank-to-bank transfers are the only way to move electronic funds (i.e. credit cards, debit cards, Google Pay, Apple Pay, etc). The other organizations involved in processing a transaction offer additional services or value, like increased security and accuracy of the transaction.

• Acquiring Banks — Acquiring banks play a crucial role in payment processing. They establish and manage merchant accounts, which allow businesses to accept payments. These banks provide merchants with the necessary tools, such as point-of-sale terminals or online payment gateways, to process transactions. Acquiring banks are responsible for depositing the funds from customer transactions into the merchant account.
• Issuing Banks — Issuing banks are the financial institutions that provide customers with credit or debit cards. They manage cardholder accounts, authorize transactions, and ensure that customers have enough funds or available credit to complete purchases. Issuing banks prioritize cardholder security and protect against fraudulent charges.
• Payment Processors — Payment processors act as intermediaries between merchants, acquiring banks, and issuing banks. They facilitate the secure transmission of payment information, verify transactions for fraud, and provide additional services such as reporting and analytics. Payment processors bridge the gap between the technical aspects of payment processing and merchants’ needs, making it easier for businesses to accept various forms of payment.
• Card Networks — Card networks (i.e. Visa, Mastercard, American Express, and Discover) serve as the infrastructure that enables transactions to occur. They establish the rules and standards for payment processing, ensuring consistency and security across the industry. Card networks facilitate communication between acquiring banks and issuing banks, overseeing the flow of information and funds.

Understanding Transaction Fees

Payment processing has a hierarchy of costs associated with it. Each player in the payment ecosystem charges a fee in order to provide its services, including the following:

• Interchange Fees — Interchange fees are transaction fees paid by the acquiring bank to the issuing bank (or card issuer) for each credit or debit card transaction. These fees are set by the card networks and are meant to cover the costs and risks associated with processing card payments.
• Processing Fees — Payment processors charge merchants a processing fee for their services. These fees can vary based on factors such as transaction volume, average transaction size, and the type of card used (debit or credit).
• Assessments — Card networks impose assessments on acquiring banks, which are fees based on a percentage of the transaction volume processed through their network. These assessments support the card network infrastructure and security initiatives.

Final Thoughts

Utilizing the information in this article will give you a better idea of payment processing and help you make more informed decisions. As you evaluate different payment services, don’t be afraid to ask questions and continue researching the industry segment, as changes can occur frequently.

It’s important to develop a payment strategy that looks not only at your needs now, but also for future growth, and Nexio is here to help. Our payments solutions help businesses of any size — from start-ups to multinational corporations. Contact us today and see what Nexio can do for you!