Behind the plastic: navigating the credit card landscape

Merchant accounts, credit card processing fees, and payment processing models can be complex – payment middle-men and technology aid the space, as new players emerge from non-banking sectors

4 July 2018

Visa’s recent systems outage prevented merchants from accepting credit card payments. End-users lamented the queues for petrol, groceries, and disruption caused by rejected Visa credit and debit cards. Sources reported that the Bank of England contacted Visa immediately. Large and small merchants alike were unable to accept payment, leading to revenue losses from the connection lapse. Taken for granted, the UK’s cashless society relies on credit card issuers’ processors to connect payment requests with bank authorisations. Without these seamless interfaces, credit cards are merely rectangular plastics.

Merchants connecting into the UK and global cashless network enter a gateway of opportunity to accept credit card payments across the spectrum of credit card issuers. Merchants choosing to do business with credit cards need to arrange for special merchant accounts with an acquiring bank. On behalf of merchants, acquiring banks process daily credit card transactions within a credit card association – that is, they are are members of well-known credit card associations. Visa, Mastercard, Discovery, AMEX, and Diners Club are amongst the most popular in Europe. At the end of each day, member acquiring banks process each other’s transactions across a secured network operated by the card association and the clearing system.

The accounts available to merchants vary from traditional banks like HSBC, RBS, and Barclays to specialised providers like WorldPay, PaymentSense and Elavon. Historically many of the high street banks had integrated merchant services across merchant and business accounts. For example, WorldPay was the offspring of NatWest and RBS but strategically spun off into merchant payment processing, delineating customer accounts into two: merchant (credit card processing) and business (cash).

Integrated merchant and business accounts offered by BarclaysCard offers merchant accounts and services under a single brand. Barclays rents out the payment device or PoS (point-of-sale) and enables merchants to accept credit cards. Barclays, a member of the Visa card association contacts a customer’s bank and verifies whether there are funds for a purchase. Charges for a merchant account and credit card processing fees can depend on the length of the service contract or pay-as-you-go, combined with fees for the PoS and transactions. Examining the integrated merchant account bill, standard fees could include amounts for the merchant account service, transaction fees related to different credit card channels (ie PoS, online submissions, phone tap etc.), processing fees related to nominal amounts, fees for cash transfers, and equipment rental. The charges of connecting into the credit card, cash-free technology can be costly. Businesses operating on high volume and nominal value transactions may pay more as some fees are based on a percentage of the amount charged.  

More complex credit card processing operating models require an acquirer to handle credit card payments. While "acquirer" may not be common terminology, taking a quick look at PoS terminals or payment processing online pages reveals major brands.  Self-styled the UK’s leading paying processor, WorldPay delivers credit card services to SMEs, larger retailers, and corporate clients. To persuade merchants of the payment processor’s capabilities, WorldPay notes that is able to process around 400 transactions per second, capturing approximately 42% of the UK’s total transactions (all card payments).

Conceptually, WorldPay’s credit card processing services are not like a merchant bank account but more like a service – merchants rent equipment and pay for credit card process fees. WorldPay enables merchants to keep a ledger of all transactions, but does not house the payment. Users can exercise flexibility by accepting WorldPay services, and depositing credit card sales into a business account from any bank. Credit card processing fees associated with acquirer services do not differ greatly from integrated credit card processing models. WorldPay credit card payment services charge customers according to their price plans: a single acquirer fee; fixed monthly service and rental charge; blend of fees based on business volume and fixed services; or per transaction charges. In line with payment technologies, online payments, PoS, and mobile terminals can also be used by merchants subscribing to credit card services.

Market options

Taking a look at other transaction processors, or acquirers’ credit card payment services and processing fees creates a clearer picture. Elavon organises its businesses across sectors (spanning airlines, hospitality, restaurant, retail and public sector), merchant accounts can be arranged vertically for SMEs, enterprises, and global businesses. Most complex are global businesses due to the high volume of demand and payments. Elavon’s airline industry merchants like KLM, American Airlines, Air Canada, Delton, and Emirates operate a volume business. Transparency in credit card processing fees and services is essential. Elavon simplifies the bill by operating a single equation: gateway + plan costs + processing fee.

Once connected into the global payments system, transaction processors and acquirer banks follow industry rules. Visa and Mastercard credit card associations, together are the monoliths of the industry. In 2017, Visa processed 111.2bn transactions worth $7.3trn across both debit and credit cards. The company’s card processing powerhouse, VisaNet acts as a ‘clearing bank’ for card transactions. Following the path of a single transaction, swiping a credit card through the PoS terminals initiates a chain of responses within VisaNet. The request for authorisation of payment moves from the acquirer through the global telecommunications network. VisaNet’s core function is to rout messages globally with instructions for authorisation, clearing and money settlement. Responses to payment instructions are then relayed back to the merchant in seconds. At the end of the day, a ‘batch’ of transactions are recorded in the merchant’s account ledger, and funds are received once all the transactions are reconciled.

Defensively, merchants operating merchant accounts and paying for credit card service and processing fees should be aware of chargebacks and fraud. Credit card chargebacks happen when buyers request a return of their funds from their credit card issuer. These charges, are not refunds – chargebacks typically happen when consumers disagree with merchants over transactions. Under various consumer protection regimes across Europe, consumers can complain to their card issuer in circumstances of fraud and unauthorised use of their credit cards or PINs. Similarly, consumers who assert that the sale contract has not been enforced properly can complain to their card issuer and request for funds to be returned.

In the UK, credit card protection leans towards the consumer. Part of the Consumer Credit Act 1974, Section 75 safeguards consumers against faulty goods, merchant bankruptcy before making good on the sale contract, and merchant non-delivery of services or goods. In essence, consumers can request their funds be returned, with merchants and credit card issuing banks having a duty to pay. In instances where there is a dispute, merchant banks and credit card associations take this very seriously, as protocol dictates that the issue is resolve quickly. Clearly, when looking at the credit card payment services someone in the payment chain is paying for chargeback and fraud costs. For merchant banks, chargeback costs are often taken into account when on-boarding new clients and rolled into their standard fee package. Merchants who are frequently engaged in chargeback situations, additional penalties may apply.

With any payment technology, security is paramount. While physical credit card purchases have been around since the 1960s, credit card payment services have evolved from signature verification to network communications. Payment verification and authentication are fundamental to successful transactions. Hypertext Transfer Protocol Secure (HTTPS) allows information to be transmitted safely over the internet, and provides end-to-end encryption from user to end point, allowing merchants and customer banks to identify each other. The encryption and protection is issued from both start and end points, providing prudent protection. Going one step further, the Payment Card Industry Data Security Standards (PCI DSS) provide additional safeguards against fraud. Promulgated by the largest card associations Amex, Discover, JCB, Mastercard and Visa, PCI standards require merchants to adhere to established conventions. Not exhaustive, maintaining a firewall, protecting customer data, data encryption, anti-virus software and restricted access to card information are some mandatory techniques small and large merchants must use. Seemingly onerous, proper implementation of these standards are on the merchant – liability for breaches and any consequences also fall on the merchant.

Spearheaded by banks and card associations, merchant accounts, credit card processing fees, card payment services, card payment process fees in the future must compete with more nimble technologies. Firmly established as digital, credit card merchant banks and acquirers are on the cusp of great competition – up and comers harnessing tokenization, digital wallet and mobile payments squeeze middle-man acquiring fees and services. Tokenization has been the watershed moment for many disruptor technologies. Standardised digital tokens can now be requested from credit card associations verifying the validity of credit card numbers for payments over the network. Using digital tokens, Apple Pay’s emergence heralded a new type of transaction - and aims to replace the physical credit card. A testament of success, Apple now has over 87 million users – more than the 64 million credit cards in circulation the UK.

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