Merchant Acquiring

L2 Merchant Acquiring

Merchant Acquiring

Document Control

Revision
No.

Updated By

Date

Revision History

Varun Keshri/Abhinav
Sinha

3rd
Sept
2013

WIP

Varun Keshri/Abhinav
Sinha

23rd Nov
2013

Initial version

Merchant Acquiring

Table of Contents
1

Introduction
1.1

Scope of the document

1.2

Credit Cards

1.3

Transaction Life Cycle

Major Business Entities

2.1

Issuer

2.2

Acquirer

2.3

Network (Association)

2.4

Third Party Processor

2.5

Independent Sales Organization

Acquirers-Business Areas
3.1

Activities of Acquirers

Acquiring Workflows
4.1

Merchant Management
4.1.1 Lead Processing/Management
4.1.2 Merchant Onboarding
4.1.3 Merchant Maintenance
4.2
Authorization Flow
4.2.1 Types of Authorization
4.2.2 Authorization Services
4.3
Clearing & settlement service
4.3.1 Data Capture
4.3.2 Clearing
4.3.3 Settlement Process
4.3.4 Merchant Funding
4.4
Merchant Statement
4.5

Dispute Processing
4.5.1 Possible Reasons for chargeback
4.6
Merchant Servicing
5

Merchant Acquiring- Other Aspects

5.1

Trends

5.2

Regulation Impact

5.3

Challenges to Acquirers

5.4

Areas of Focus

5.5

Risk Management
5.5.1 Type of Risks

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5.5.2
6

Risk Mitigation

Merchant Acquiring Revenue Model

6.1

Merchant Account

6.2

Pricing Drivers

6.3

Processing Fees

6.4

Pricing Structures
6.4.1 Three- Tier Merchant Account Rate Structure
6.4.2 Enhanced Rate Recovery (ERR)
6.4.3 Pass through Pricing

Glossary

References

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1 Introduction
1.1

Scope of the document

This document intends to describe the details of credit card acquiring business and provide
business overview of the acquiring space and the different processes involved.

1.2

Credit Cards

A payment card product is a set of entitlements which allow the client to access the features the
provider (e.g., financial institution) attaches to the card. A Credit card is a type of a payment card
product. A credit card is issued to an individual or business that has been approved for a line of
credit. A credit card enables the cardholder to make purchases and/or draw cash up to a prearranged amount. Interest is charged on the amount of the unpaid credit balance and
cardholders can be charged an annual user fee. A credit card usually has a revolving credit
arrangement which allows consumers to pay a fixed percentage every month rather than the
complete balance.
Credit cards provide an unsecured loan to the card holder, which is one of the reasons for high
interest charged to the account holder. An exception to this rule is secured credit card where you
can draw up to a maximum of the security deposit with the issuer.
Credit cards are governed by the rules laid down by associationCard Networks like Visa/Master
Card. Apart from credit card there are other types of cards as depicted below

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1.3

Transaction Life Cycle

The life cycle of a credit card transaction remains basically the same regardless of the
type of credit card processing thats used: card-present retail, online, mobile, wireless,
MOTO or dialup.
Credit card processing begins when the cardholder hands over or swipes their credit
card through a terminal, enters the account information on a websites payment page or
provides it by phone, fax or mail to a merchant. The data is entered digitally into the
merchants system and transmitted securely to their credit card processor.
The processor initiates the authorization process with the card issuer, who approves or
declines the transaction. If approved, they issue an authorization code thats sent to the
processor and if the transaction is declined, the acquirer processor is informed and the
same is communicated to the merchant. The issuer reduces the cardholders open to
buy balance by the transaction transfer the funds to the Acquirer via card network. At the
end of the billing cycle, the issuer sends a statement to the cardholder for payment.

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Meanwhile, the processor passes the authorization information along to the merchant,
who completes the transaction as directed per the response from the processor by
issuing a receipt for an authorized sale or requesting an alternative form of payment if
the credit card was declined by the issuer. This part of credit card processing takes just
seconds to complete.
At the end of the day, the merchant electronically transmits all the credit card
transactions in one batch to the processor for settlement , if the auth process is terminal
captured and if it auth capture is host based then auth sysyem capture all the details on
its own. The processor sorts throughcreates settlement file for each of the card networks
and submits the transactions to the appropriate card issuers network for payment., and
the issuers release the held funds to the processor for distribution to the merchant.
The processor deposits the funds into the merchants account, usually within 48 hours.
At the end of the month, the processor bills the merchant for its services.
Throughout the entire life cycle of a credit card transaction, the secure transmission of
card data is of paramount concern to the merchant, merchant services provider, card
issuer and the credit card networks.
Below diagrams show a typical transaction processing activity of a credit card with all the
involved entities.

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Authorization

Clearing and Settlement

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2 Major Business Entities

2.1 Issuer
The Card Issuer is a bank or other financial institution that extends credit or initiates a payment
via a credit card to a Buyer with whom they have signed a contract, normally a traditional credit
card application, to provide these services. The Card Issuer is also responsible for making
payment to the Merchant Acquirer on behalf of the bBuyer. In the case of an independent
CardON US transaction Issuer, the Card Issuer and the Merchant Acquirer may be the same
party.

2.2 Acquirer
The Merchant Acquirer is an organization that enables a Seller to accept a specific type of card
as a payment alternative and to receive payment for a card transaction. Merchant Acquirers
solicit, screen, and accept Sellers (merchants) into their specific credit card acceptance
program. They also accept and process merchant sales drafts and provide a Seller with point-ofsale terminals, instructions, and support services. In the case of an independent Card Issuer, the
Card Issuer and the Merchant Acquirer may be the same party.

2.3 Card Network (Association)

An organization owned by members, which services and obtains processing services for
members and functions as a principal/proprietary member of VISA or MasterCard.They

2.4 Third Party Processor

A Merchant Processor is a provider contracted by the Merchant Acquirer to provide network and
other services to Sellers (merchants). It is distinct from the actual Merchant Acquirer in that it
does not actually extend credit; it simply processes the transaction, enable them to accept card,
provide support, provide terminals etc.the payment. Some specialized Merchant Processors
handle only a portion of the transaction function (for example, transferring a transaction from the
Seller terminal to the Merchant Acquirer), while others provide value-added services, for
example, to airlines and gas stations. In the case of an independent Card IssuerOn Us
transaction, the Card Issuer and the Merchant Processor may be the same party

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2.5 Independent Sales Organization

An Independent Sales Organization (ISO) may perform some functions for the Merchant
Processor or the Merchant Acquirer. ISOs originally developed as outsourced sales
organizations for Merchant Acquirers. They have since taken on many of the functions of
Merchant Processors. Many Sellers deal only with their ISO and never interact directly with any
Merchant Processor or Merchant Acquirer.

3 Acquirers-Business Areas
At a high level, acquiring is best understood as a set of functions provided to card-accepting
merchants by different companies with varying degree of functional bundling. In broader sense,
acquiring refers to functions supporting all of merchants need in card payment acceptance.
Major services provided by Acquirers to Merchants are:

Merchant boarding and infrastructure provisioning for card payment acceptance. This
includes POS terminals, software etc.

Authorization processing of merchant transactions

Facilitate Clearing and Settlement through the associationCard network.

Handling Dispute transaction on behalf of merchant

Information services such as Statements, data analytics, MIS reporting.

In practice, term acquiring can include all or only some of these functions. It is to be noted that
processors like First Data, Chase Paymentech are more visible on the acquiring side of the
business where they may be the entities merchants contact with than on the issuing side
where they tend to act behind the scene. On the acquiring side they may be the entity visible to
the merchant and loosely be termed as acquirer by the marketplace. Role of acquiring bank
can sometimes be limited to fund settlement only.

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3.1 Activities of Acquirers

Acquirers have two major activities viz. Merchant Acquisition & Merchant Processing.
Merchant Acquisition It refers to signing up the merchants, installing POS and providing
trainings (if required) to merchant employees

Merchant Marketing: This process includes promoting the acquirers card acceptance
service to merchants. Usually, an acquirer has full-time employees who call on the larger
merchants, while an acquirer will contract with one or more ISOs to sell and service
smaller merchants.

Application Processing: As part of the merchant application acceptance, an Acquirer

develops merchant application approval guidelines that determine whether it will accept
or decline a merchants application, the risk profile of a merchant and any risk premium
for the price quote (called Underwriting). As an example, a restaurant that has been in
business for several years will be viewed as having much lower risk than a new merchant
promoting a new product over the phone.

Based upon the merchants application and the credit / risk approval guidelines, the
acquirer will either approve or decline the merchant for providing a card acceptance
service. For approved merchants, Acquirer grants a merchant account and signs up the
merchants for transaction acquiring through formal agreements (Merchant Processing
Agreement of MPA)indicating the merchant discount rate and terms

Merchant Setup: Provide POS terminals and connectivity to Acquirer system on

lease/rent and training of merchant personnel

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Merchant Processing It includes routing transaction authorization requests from the
merchant to the card issuing institution and relaying issuers reply back to the merchant,
handling the flow of electronic and paper receipts, transaction clearing and fund settlement, and
providing ongoing services such as repairs, monitoring, and the provision of supplies.

Transaction Processing: Acquirers maintain, directly or indirectly, a twenty-four hoursper-day operating connection to the network (e.g. MasterCard, Visa) switch and transmit
all transactions originating from merchant POS to network switch and relay back
authorization response whether to honor or decline the transaction. Transactions may be
captured at Merchants end (Terminal Capture) or at Acquirers end (Host Capture). Files
are processed in batch mode at predefined intervals (usually at end of day) and funds
due to the merchants are settled by acquirers as per frequency defined in the service
contract with the merchants.

Merchant Settlement: Acquirers credit or debit (as applicable) merchants designated

bank account with the amount, (net of merchant discount) of all transactions as per
contract. Acquirers reimburse merchants usually within 72 hours.

AssociationCard Network Clearing: Acquirers in-turn receives reimbursements from

Issuers through the AssociationCard Network for the payments made to merchants.
Acquirer presents the transaction details to associationCard Network which then
validates the transactions and sends back reconciliation report to acquirer.
AssociationCard Network funds the acquirer according to the reconciliation report.

Merchant Statement: Acquirers generate & provide detailed statements summarizing

electronic transactions to the merchants, payment effected to merchant bank account,
set-up & maintenance fee charged, dispute transactions etc.

Merchant Servicing: Merchant service is provided on-site or via a call center and could
include such services as a request for supplies or additional entitlement or infrastructure,
a complaint about malfunctioning POS device or a dispute about a chargeback. Acquirer
needs to ensure that merchants are provided with all materials necessary to effect
transactions in compliance with associationCard Network rules. These materials may
include POS terminals, PIN pads, advertising displays, and other point-of-interaction
promotional materials bearing the Service Marks.

Security & Fraud Management: Card transactions and merchant behavior are
monitored for fraudulent activity. If suspicious transactions are identified, this group will
review the transactions and potentially reject any subsequent transactions, hold funds,
disable the merchants card acceptance capability and notify the government
agencies/police.

Disputes (Retrievals / Chargebacks): At any time, a cardholder has the right to

question whether a transaction is legitimate. If and when card issuer considers this a
valid dispute this is forwarded to concerned card associationCard Networks (like
MC/Visa) as a Chargeback request. AssociationCard Network forwards chargeback
request to the acquirer who either responds on behalf of the merchant or forwards the
request to the merchant for fulfillment. The acquirer may be requested by merchant to

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dispute a chargeback, which is dealt with through a dispute rules & regulations defined by
concerned card associationCard Network. Acquirers must ensure the provision and
support for processes to facilitate the handling of transaction inquiries, disputes,
transaction documentation requests etc.

Collections & Recovery: If the merchant defaults on outstanding fees (e.g., bankrupt,
goes out of business), then the merchant collections process will be invoked to retrieve
the dues.

Legal / Regulatory: An acquirer must comply with the operating regulations and by-laws
of each card associationCard Network/organization. Periodically, the acquirer will receive
updates from the card netwrok card associations / organizations, which the acquirer must
interpret and implement in its operations and systems.

Income accounting and Portfolio Analysis: Track income from rental of POS devices
and other hardware, software, merchants discount fees and various income streams.

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4 Acquiring Workflows
4.1 Merchant Management
Merchant Management refers to the set of activities which is intended at acquiring a Merchant
and then on-boarding the merchant and making any demographic changes to Merchants profile
as and when requested by the Merchant.

4.1.1 Lead Processing/Management

Lead Management is a set of methodologies, systems, and practices designed to generate new
potential business clientele, generally operated through a variety of marketing campaigns or
programs. Lead management facilitates a business's connection between its outgoing consumer
advertising and the responses to that advertising. In a typical Merchant Acquiring Business Set
up these processes are designed for business-to-business. Lead management is in many cases
a precursor to sales management and customer relationship management. This critical
connectivity facilitates business profitability through the acquisition of new customers, selling to
existing customers, and creating a market brand. This process has also accurately been
referred to as customer (Merchant) acquisition management.
The process creates architecture for organization of data, distributed across the various stages
of a sales process, and across a distributed sales force. With the advent of the Internet and
other information systems technologies, this process has rapidly become technology-centric, as
businesses practicing lead management techniques have shifted much of the prior manual
workload to automation systems, though personal interaction with lead inquiries is still vital to
success.
The system used for maintaining Leads could either be an in-house system or a third party
product available in the Market.
Presales activity:
Presales activity includes marketing the card accepting feature of acquirers to the Merchants.
Usually internal employees of Acquirers contact large merchants whereas independent sales
organizations (ISO) are used to contact small merchants. ISOs also help acquirers increase
their reach.

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4.1.2 Merchant Onboarding

The key activities of the Acquired for onboarding are as follow:

1.
2.
3.
4.

Application Processing
Account Set up
Welcome Kit Generation
Terminal Set-up

Application Processing: Its starts with the Merchant signing up the application forma and all
their demographic, transaction details etc. Merchants also select other entitlements, equipment
details and other services. The process involves the credit underwriting of the Merchant and his
business. The application of the Merchant goes through various validations (Acquirers develop
guidelines/criteria to accept a Merchant application) based on which the decision is made
whether the Merchant will be on-boarded or not. The credit history of the Merchant is very
crucial in deciding if the application of the Merchant will be approved or declined. Based on the
risk profile of the merchant, Acquirers will decide how much risk premium needs to be charged.
For e.g. a restaurant that has been in business for several years will be considered low risk
whereas a new online merchant will be considered higher risk and will attract a higher risk
premium.
Account set up: On successful completion of the Application processing the details of the
Merchant is fed in to the Merchant Database and an id is created for the Merchant which is
known as MID. The merchant is identified going forward with this MID. Primary MID for a
merchant can be mapped to multiple secondary MIDs based on the hierarchy set up for the
merchant.
The Merchant database includes merchants name, addresses, contact information, cards
entitlement, POS terminal information, billing attributes, statement attributes etc. Most of these
attributes will be written in the service agreement. Master database of merchants are maintained
in Settlement backend system, from where, merchant information is shared to other systems like
Authorization, Dispute Management etc.
The networks for which a Merchant has signed up for are set up against the MIDs and
associated Pricing (rates & fees) are tagged to the MID. The prices usually are discussed and
agreed upon by Acquirers and Merchants. Acquirer will have pre-approved pricing template for
merchant business category, business volumes, Card network & other parameters.
Depending on business needs, bigger merchant portfolio may need a customized pricing plan,
which needs to be underwritten for risk and profitability.
Welcome Kit Generation: Welcome kit has the Welcome letter, merchant agreement, network
decals and POS terminal. A merchant can activate the terminal by connecting to internet and
calling to Customer help desk.
Terminal set up: TID denotes the terminal id for the POS given to the Merchant. The TID can
be mapped either to the Primary MID (in case of a single store merchant) or there could be
multiple TIDs mapped to MIDs (in case a single merchant have multiple stores). The terminal is
configured and set up for the merchant. The Terminal is updated for new software releases and
also if a new payment type is added to Merchants portfolio.
Merchant Boarding Models:

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Merchants could be boarded through different channels and system requirements vary
according to the different boarding models. Below are some common boarding models

Direct Merchant Boarding: Usually this kind of boarding in done for merchants doing
bulk of their business over the internet from e-shopping portals. Merchant is usually
provided with a promo code that defines the applicable charges and facilities that a
merchant receives and the merchant is expected to enter all the information that will help
the acquirer decide on the credit risk. In case of any questions that the credit department
of the acquirer might have for the merchant, emails or other types of communication will
be directly sent out to the merchant

Field Sales Sales Executive Boarding: Sales agents on the field have access to the
merchant on-boarding application while they are out in the field soliciting merchants.

Telesales/Sales Executive Boarding: In this model, merchant solicitation is done over

phone by Telesales agent. Agent also collects the information from the merchant &
negotiates pricing terms. After agent submits the application, it is sent to merchant for
review and to enter further details (like SSN, ABA/DDA nos.). After the submission of the
application, workflow will involve both sales agent & merchants.

ISO Agent Boarding: ISO (Independent Sales Organization) is an organization which

signs up merchant and provides value added service. ISO normally enters into an
agreement with Acquirer (or Processor) to provide basic acquiring services &
infrastructure for its clients. Merchant solicitation and data entry is done by the staff of an
ISO. As per ISOs policy, a quality check might be required on the application that is
entered on the boarding system against the signed merchant agreement that is available
to the ISO. In case of any questions that the credit underwriting department of the
acquirer might have for the merchant or outcome of the credit decision, the ISO is notified
through established communication channels.

Following diagram shows the flow of Merchant Acquisition activity

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4.1.3 Merchant Maintenance

It allows making changes to the Merchant profile in the Merchant Master on a need basis. The
changes could be done using the Boarding user interface. Some of such amendment may
warrant new underwriting check (e.g. re-pricing).Few typical scenarios for Merchant
amendments are:

Merchant Address change

Addition of merchant outlet
Merchant wants new pricing plan

4.2 Authorization Flow

Authorization means, barring any future disputes, payment is guaranteed to the merchant. Once
a sale is processed, next step is to store the sales information. Usually merchant collect all sales
information inside merchant terminal (terminal capture) or acquirer authorization system (host

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capture) and send it to acquirers settlement system at the end of the day for fund settlement.
Bigger merchants may even send out the details multiple times a day.
Processing authorization is operationally a critical function of Card acquirers. When cardholder
swipes a card at the merchant POS terminal, it transmits the transaction to acquirers
authorization system which will send the transaction through payment network (MasterCard,
Visa branded networks) to card issuer for authorizing the sales transaction. Issuer runs some
verification on the card such as available balance, cardholders details, security checks etc.
and then sends response back to the merchant through the same path. Depending upon the
response by issuers the transaction is approved or declined (see figure below). The entire
process generally completes in few seconds even when the merchants and card issuer are
located in different continents.

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Technically, Authorization process involves capture and flow of information from different types
of physical devices in real time as below

POS Terminal: All merchants need to have a Pont of Sale (POS) terminal where
cardholder can swipe their card and enter PIN (in case of PIN-debit card) in order to pay
for goods or service. Also customer service personnel can key in card details in the
terminal to initiate a card transaction without the presence of actual cardholder (e.g. you
want to buy airline ticket over phone and furnish your card no., expiry date, CVV to the
operator). EMV capable terminal can read the data from smart Chip of the EMV (also
called Chip & PIN) card & additionally instruct cardholder to enter secure PIN for
authentication.
For ecommerce transaction cardholder enters similar details at the website which has
specialized programs/COTS product to perform functions of a POS terminal. POS
terminal also displays the result of authorization request as accept or decline with
associated messages within stipulated time from transaction initiation.

POS Switch: Since large merchants tie up with multiple acquirers, they need a POS
switch in their premises to route the request to appropriate acquirer. Also having a POS
switch helps in maintaining business as usual, even if one switch is down others can
back up. This is not the case with smaller merchants who usually have tie up with single
acquirer and hence they send their transaction directly to Acquirers authorization switch
from POS terminal. Depending on the configuration, POS terminal or POS switch logs
transaction authorization details such as card data, transaction amount, authorization
code, authorized amount, transaction reference (Retrieval Reference No. or RRN),

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unique no. for merchant and terminal (MID, TID) etc.

Payment Gateway: For ecommerce transactions, merchant website captures the

payment details and transfers these details to payment gateway. Payment gateway builds
authorization request and send the auth/sale message to Authorization Switch of the
Acquirer. On getting the response back from acquirer switch, it sends back the response
to merchant website. Additionally payment gateway offer value added service to ecommerce merchants like fraud management, 3D Secure, Batch Authorization etc. In
hosted page model, merchant can also use the payment acceptance page hosted in
payment gateway.
Acquirer Processor generally offers its own payment gateway to merchant or can
support third party payment gateways.

Acquirer Switch (Authorization Host): When Acquirer (or Acquirer Processor) receives
the authorization message from merchant it performs variety of functions

Identifies different types of transaction coming from the merchant (Credit, Signature/PIN
debit), card associationnetwork (Visa, MasterCard, Amex, Discover etc.)
Reformats the Merchant data format into its internal format. Though many merchant send
or receive auth request in acquirer prescribed format some send the details in their own
format for different reasons hence the need for reformatting.
Validates the transaction. Some typical validation includes
o if the card number, merchants or terminals details are bogus or wrong
o Merchant is entitled to accept Visa/MC/other card types. It may happen that
merchant entitled for Visa is sending MC transaction
o Transaction amount. If it is below the Floor limit, acquirer can approve the
transaction themselves without passing on to MC/Visa. If it is too high,
transaction can be rejected.
Enriches the transaction with additional data required by associationcard network or
issuer to identify all the attributes to authorize the transaction. Some key data attributes
mentioned below
o Merchant no (MID).
o MCC or merchant category code - to identify business of the merchant retail/
airline/ petroleum
o Acquirer BIN/ICA so that AssociationCard network can identify the acquirer
who sent the request
Reformats the transaction message to associationcard networks proprietary format and
routes the transactions to the Card Authorizer network (e.g. MC or Visa for credit
transaction or appropriate EFT network for PIN debit). It creates a unique reference for
the auth request and retains a persistent connection with associationcard network
network switch.
When the authorization response is received from associationcard network network,
acquirers authorization host matches it with auth request and sends the response to
merchant terminal or POS switch where it came from.
Captures the authorization log with all the details relevant details it sent to
associationcard network and received in response (e.g. card details, merchant details,
ARN, transaction identifier from AssociationCard network, transaction amount, authorized
amount, authorization response, response code etc.)
Captures Settlement log for the merchants who have designated acquirer to capture it on
their behalf. This is called Host Capture. During settlement, additional details are required
to assess the risk level of transaction which has important bearing while calculation of

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Interchange fee. These details are prescribed by card associationcard networks. For
example, journey details for airline transaction, stay details for hotel, tax information to
name a few. For smaller merchants, these details are captured at POS terminal it is
called Terminal Capture.

AssociationCard network Switch: It performs validation, identifies the card issuer and
forwards the message to appropriate issuer authorization system. Upon receiving the
response from issuer it relays back the same to correct acquirer.

Issuer: If Cardholder has sufficient available balance (i.e. unused credit) and the Card is
valid and meets the security criteria, credit card issuer (or processor, on behalf of the
Card Issuer bank) authorizes the transaction. Otherwise it declines the Auth request. It
sends the authorization approval/decline message, reason code to AssociationCard
network.

Message Protocol: POS terminal, Payment Gateway, Authorization Switch,

AssociationCard network Switch exchange messages in industry standard format. Most
common authorization message format is ISO 8583; however it can have different
accepted variation like Host ISO87, BIC ISO etc.

4.2.1 Types of Authorization

Stand in processing (STIP) Authorization that is below a floor limit can be approved by
acquirers directly. Transaction need not be routed to issuer. Floor limit can vary by
associationcard network and merchant business.
Store & Forward Sometimes the acquirer connectivity to network may be down due to
technical reasons. During the down time, merchants may still want to do business and willing to
take the risk of transaction authorization. Compatible POS terminal would store auth request
locally and when the connectivity is up would send all stored transaction to associationcard
network. If any stored transaction is declined by issuer, merchant loses money.
Exception File AssociationCard network has an exception file which it refers for fraudulent
account numbers during authorization.
On-Us Transaction If issuing and acquiring parties (bank/processor) are the same, they may
bypass the associationcard network and directly process authorization. This is known as On-Us
transaction. AssociationCard network would still get its fee for On-Us transaction.
Off-Us Transaction If issuing and acquiring parties are different, they need to go through the
associationcard network. This is known as Off-Us transaction.
Authorization Reversal In case the goods purchased is returned back before the settlement
of transaction, the original authorization needs to be reversed. This process is known as
Authorization reversal. It can be complete or partial; depending upon whether the goods
returned is partial or complete.
On-Line Authorization - Authorization is typically performed on-line and completed in a matter
of seconds. Under on-line processing, each transaction is authorized separately as it occurs,
and the authorization status is returned immediately after the transaction is submitted for
approval. If an on-line authorization is declined, the cardholder will immediately be made aware

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that their transaction was not completed with the card used for payment. Online Authorization
can have two scenarios. Card is Present and Card not present (CNP). In case of Card
Present transactions merchant have the credit card in front of them and they swipe it for
payment. Card not Present scenario is for situations like internet purchases or Mail
Order/Telephone Order (MOTO) where card details are provided to the merchant but actual card
is not presented at the POS. Fraud risk is much higher for CNP transaction than Card Present
transaction.
Batch authorization Batch or Offline authorization is used for a large number of transactions
which are batched and transmitted to AssociationCard network on a scheduled basis, such as at
the end of the day. Batch authorization is best suited for programs where the service or product
is not provided to the customer at the time the card number is presented or when the cardholder
is not directly communicating with the agency, such as a mail order transaction. In the event of
a declined batch authorization, the agency must contact the customer to pursue authorization
(e.g., using a different card) or inform them that their transaction will not be completed.
Incremental Authorization In case of incremental authorization, merchant can increase the
amount authorized on a previously generated authorization number. This is common in case of a
Hotel transaction where if customers need to increase their stay by a day, they need not get a
new authorization for the incremental amount. On the previously received authorization number
merchants can add this incremental amount. Issuers will still verify if the card qualifies for the
incremental amount that has been requested for.
Pre authorization - Pre-authorization of your credit card is technically a "hold" on your credit card
credit line from a purchase placed there by a merchant who has initiated a charge, but not
completely processed it. When the merchant actually completes the charge process, the preauthorization amount will be replaced by an actual charge debited from your card.
Pre-authorization is generally done for those businesses where cost or amount of good/service is
not known until the same has been handed over to the customer. A good example is when
customer fills up gasoline (petrol) for the car from self-service gas station (outside store). Before
the customer can fill in gas, pre-authorization is done for specific amount to check if the card is
good for highest amount of gas that can usually be filled in the car. Once the gas is filled, actual
cost of the product is known, charge is processed and Pre-auth amount is replaced by actual
charge amount. For the duration of the pre-authorization, card credit limit will be lowered by the
"hold" amount on the card. If the charge processing is completed by the merchant, hold will lapse
after certain number of days.

4.2.2 Authorization Services

These are all value added services. It is not mandatory for a merchant to subscribe for these.
Subscription is totally on the discretion of the merchant.
Voice Authorization - A voice authorization approval response obtained through interactive
communication between an issuer and an acquirer, their authorizing processors, through
telephone, facsimile, or telex.
Partial Authorization - Merchants are required to partially approve a transaction if a cardholder
does not have enough balance on their debit, prepaid or gift card. In addition, the merchant must
allow cardholders to pay the remaining balance owed with another form of payment.
Card Verification Value (CVV or CVV2) CVV is an anti-theft security measure to help prevent
fraud. It is usually a 3 or 4 digit number printed at the back of the card. During CNP transaction,

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cardholder would furnish CVV to the merchant which would indicate that cardholder physically
possesses the card.
Address Verification Service (AVS) AVS is used by many merchants to find discrepancies
between customer address registered with issuer and the shipping address of the purchase.
This helps in identification of a fraudulent activity. If a customer in one end of US asks for the
product to be shipped to another end, it may be a fraudulent transaction but sometime can prove
to be false positive as well.

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4.3 Clearing & settlement service

Once a Credit Card Transaction is authorized, the Merchant hands over the merchandise to the
Cardholder. But for posting of the transactions to both Merchants and Cardholders account and
complete the monetary settlement between different participant in the transaction, the below
processes need to take place:

Data Capture (Transaction Submission) : Capturing the Settlement data at Merchant

POS (Terminal Capture) or Acquirers Host (Host Capture) and submitting the Settlement
details for Clearing processing

Clearing : Exchange of Transaction between Acquirer and Issuer thru AssociationCard

network and Calculating and reconciling who owes what to whom

Settlement: Exchange of Funds between Issuer and Acquirer thru AssociationCard

network keeping each ones share of fees and funding the Merchants account for the
submitted Credit Card Transactions

The high level process flow of Clearing and settlement is given below:

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4.3.1 Data Capture

The Settlement details of the Transactions are captured either at the Merchant POS (Terminal
Capture) or at the Merchants Acquirer processors Host machine (Host Capture) at time of
Authorization process.
This transaction details include some basic information like Cardholder Number, Transaction
Date, Transaction Amount, Card Expiry Date, and Merchant Identifier (MID), Terminal Identifier
(TID) etc. Depending upon the sophistication and the Data Capture capability of the POS
device, it may also include various other information depending upon the Merchant industry and
Type of Card as per AssociationCard network mandate, to get the transaction qualify to a better
Interchange Fee program (i.e. the more information is captured at the POS, the lesser might be
the Interchange Fee to be paid by the merchant to the Issuer).
Below are few Examples of Additional Information Captured at POS or Host:
Depending upon Merchants Industry:
Restaurant : Tip amount is captured at the POS and passed in the Transaction details

Lodging: Check-in and Check-out Date, Room-Rate Duration of stay are captured as part
of transaction details.

Airline: Passenger Information, Ticket Information, Leg Information of the Journey are
captured

Depending upon Card Type:

Commercial Card : Tax Amount, Order Number (called Level 2 information); Unit price,
Item product code, Item Description, Item Quantity, Item Amount etc. (called Level 3
information)

Fleet Card(i.e. Petroleum Card) : Fuel Product code, Fuel Quantity, Fuel unit of measure
(i.e. Liter, Gallon etc.), Fuel Unit Price, Odometer Reading, vehicle Number, Driver Id etc.

Data Capture process:

At the end of the day or at a certain time interval, Merchant closes the Batch. This means,
the transactions captured within this time interval are passed to the Acquirer for Clearing.
If the transactions are captured via Terminal Capture, then at the Batch-close, the details
of the transactions during this time window are sent in batch to the Acquirer. If the
transactions are captured via Host Capture, a summary of transactions during this time
window is sent to the Acquirer for reconciliation with the transaction details captured at
the Acquirers Host.

The Data Capture system of the Acquirer reformats the Transaction details from the
merchants format (mostly bit-map) to Acquirers internal format

The Data Capture system also matches the Settlement Transaction details with the
Approved Authorization , to eliminate the rejected transactions and only pass the
approved Transactions for further processing

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If the merchant is not in agreement with the Acquirer to capture its transaction details, the
merchant may send the Settlement details (captured by him/by some other processor)
directly to the Acquirer processor for clearing. These are called Direct Send Merchants

4.3.2 Clearing
The transactions captured by Data Capture Process or provided directly by the
Merchants are passed to the Clearing process in a regular time intervals (cuts).
Clearing Process has the following Steps:
1. Data Reformatting

The settlement details for the transactions from various sources (like Data Capture
system, Direct Send Merchants) are reformatted to a common internal format for the
ease of further processing.

2. Settlement Data Enrichment

Settlement details captured by the Acquirer/sent by the merchants are enriched with the
Authorization information, merchant information and Card Issuer/AssociationCard
network information to ensure a better interchange fee rate for the transaction (a better
qualification). Also, some of this information are required and mandated by the
AssociationCard networks.
3. Enrichment with Authorization information (Auth Matching):
Settlement details sent by the merchants or captured by the Acquirer are matched with
the Authorization details from Authorization log created during the Authorization process.
Auth Logs can be received from Acquirers Authorization system (in case the Acquirer
provides the Authorization service to the merchant) or some Third Party (in case the
Authorization service is provided to the merchant by some third party). It is possible that
for direct send merchant, no Authorization and Settlement matching happens at all and
merchant sends Auth-matched settlement data.
Auth-matching is mainly done on the basis of following fields: Card number, Merchant
Number, Transaction Date, Transaction Amount and Auth code.
Examples of some fields from Authorization Log that enrich the settlement details : Auth
Code, Visa/Amex 15 digit Transaction Identifier, Master Card Bank-net Reference
Number and Date, POS entry mode, Cardholder Activated Terminal indicator,
Authorization Characteristics Indicator (Card present and CVV processed, Card not
present and address verified etc.).

Enrichment with Merchant Information: Various Merchant attributes are retrieved and
added to the transaction details if they are not already present in the settlement data.
This information is used to enrich the settlement details as well as default various fields.
Some examples of the merchant attributes used to enrich settlement details: Merchant
DBA name, Merchant Address details, Product Level MCC code (Merchant Category
Code identifying merchants industry i.e. restaurant, lodging air-lines etc.), Merchant
pricing Plan, default POS entry mode, POS Terminal Capability etc.

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Enrichment with Card Issuer/AssociationCard network Information: Settlement

details are enriched with some Card Issuer information (e.g. Issuer region code, Issuer
country code) and Card information (e.g. Card Type procure card, business card etc.,
Card usage Credit or Signature Debit). These fields are used by Transaction
Qualification process as well as populated in the Outgoing files to AssociationCard
network.

4. Settlement Data Validation

The Settlement Details by the Merchants are validated to check the completeness and
accuracy of each transaction and also of the whole merchant submission. In case there
is a problem with the whole submission,
Merchant is notified to resubmit the transactions. If an individual transaction is failed to
pass the validation, it is rejected and reported to the merchant thru Merchant
Acknowledgement process. Rejected transactions are sent to Reject Re-process
system for correction and re-submission. For these rejected transactions, merchants are
not funded.

Following are some examples of validation and Reject Edits:

Merchant is valid or not (i.e. cancelled or closed merchant)

Cross Day and Same Day Transaction Level Duplicate check

Invalid Card number, Transaction date or Amount

Insufficient Additional information provided with the transaction for a particular card
product
The merchant submission is out of balance with the total accumulated transaction
amount in it.

Qualification and Interchange Fee Calculation

Interchange Fee: It is a fee paid by the acquiring bank to the Issuer Bank for Issuing
bank bearing the risk of non-payment and for providing the free Credit period to the Card
Holders. The Acquiring bank in turn, deducts that amount from the transaction amount
while funding the merchants.
Interchange Fee rates are determined by the associationcard network rules who act as
intermediaries between the members of either ends of the transaction. But the
Interchange fees are not retained by the associationcard networks
This Interchange fee is proportional to the risk associated with the transaction. The higher
is the risk, the higher is the fee and Vice versa.

Interchange fee is deducted from the transaction amount at the time of settlement from
Issuer to acquirer via AssociationCard network and processors.

There is a fixed and a variable component of the Interchange fee. For example if the
purchase amount is $100 and the Interchange Fee is 1.5% plus 7 cents per transaction,
the amount of the Interchange fee would be : $100 x 1.5% + $.07 = $1.57

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Interchange fee is calculated based on how a transaction "Qualifies" for a rate. The
transaction Qualification depends upon various attributes related to the Authorization
and settlement of the transaction.

The qualification rules are governed by AssociationCard networks (i.e. MasterCard/Visa).

These rules are updated twice in a year during Spring Release and Fall release.

Both Visa and MasterCard have rules whereby a transaction gets an optimal qualifying
rate depending upon the transaction attributes or the best rate possible for that
transaction type, and also sub-optimal or more expensive rate categories. If a
transaction fails to qualify for the best rate, it downgrades to a lower rate.

Qualification criteria generally include (but not limited too):

Various Authorization and POS attributes for a transaction like Auth Code, POS
Capability, POS Entry Mode, PIN Capability
The timeliness of the transaction i.e. the difference between the date of transaction
and the date on which it is submitted.
Card holder and Card was present at the time of sale or not, e.g. for MOTO transactions
Card is not present and rate is higher.
Signature obtained or not
Entire Magnetic stripe (Track1 and 2) is read or not
The quality of data depending upon the type of industry. For Example, a hotel merchant
should send in Check-in, Check-out dates to get a better rate.
If these criteria are not met, the transaction qualifies for a different and generally less
favorable rate. The most common reasons for transaction downgrades include key-entry
at the point of sale and failure to settle within smaller time after obtaining an authorization
(merchants fail to batch and send their transactions to their acquirer).
Pricing plan and Priced Fee: When a merchant is boarded a set of attributes are
assigned to it and it is designated to send transactions in a particular manner. This set of
attributes is identified by a Pricing Plan (e.g. merchant agrees to send only Magnetic
swiped transaction and within 24 hours of authorization. These criteria will constitute the
pricing plan for the merchant). Also a particular fee rate is assigned against a Pricing plan
and fee calculated on the basis of it is called Priced Fee.
Clearing Plan and Actual (Cleared) Fee: When the merchant sends in actual
transactions to the acquirer processor, the attributes of the transactions are compared
with the attributes set for a transactions at the time of merchant boarding. Depending
upon the actual attributes of the transaction a fee rate is assigned (Actual fee).
Fee programs are identified by a two digit number called IRD (Interchange Rate
Designator) for MasterCard and a three digit number called FPI (Fee Program Indicator)
for Visa.

Billback: When a merchant is boarded onto the system it is assigned with some Fee
Program (Like Merit I/ CPS Retail 2 etc.). That is called the priced fee rate for the
merchant. This is compared to the Fee program at which the transaction qualifies to and
is called Cleared or Actual fee rate. In case of Qualification downgrade, the Actual or
cleared interchange fee would be more than the priced interchange fee. The difference
between the fee amount on the basis of Actual Fee Rate and the Fee Rate assigned to
merchant is called Bill Back amount as this amount is billed back to the merchant at the
end of the month and the process of calculating this amount is called Bill-Back. So,
merchant is initially settled (i.e. funded) as per the priced fee, but at the end of the month,
the difference between cleared fee and priced fee is billed back to the merchant.
o Example: Say for a merchant, priced fee rate for particular type of transaction is
2%. So, for a $100 transaction, the Interchange fee calculated at priced rate is

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$2. Now the transaction actually qualifies at a different rate during Qualification
process in Acquiring system which is 2.5% and the actual Interchange Expense
is $2.5. In this situation, the merchant would be initially funded with $98 ($100 $2), but at the end of the month would be billed back $.5 ($2.5 - $2).
o

In case the transaction upgrades, then the reverse situation occurs (i.e. cleared
fee < priced fee) and is called Give-back as the acquirer is supposed to give
the extra fee charged back to merchant.

Reclass: When a transaction goes to the AssociationCard network from the acquirer
processor, they again qualify it. That time if the transaction downgrades then the incident
is called RECLASS and the Acquirer Processor is notified about it. This may happen in
case the Qualification rule engine in Acquiring system is not up to date with the
Qualification rule as published by the AssociationCard network.
o Example: Say for a merchant, priced fee rate for particular type of transaction is
2%. So, for a $100 transaction, the Interchange fee calculated at priced rate is
$2. Now the transaction actually qualifies at a different rate during Qualification
process in Acquiring system which is 2.5% and the actual Interchange Expense
is $2.5. In this situation, the merchant would be initially funded with $98 ($100 $2), and $.5 ($2.5 - $2) would be the Bill-back amount and hence the net funding
amount from Acquirer to merchant would be $97.5 ($98 - $.5). But when the
transaction reaches AssociationCard network, they qualify it with a further
downgrade with rate of 3% and funds acquirer with $97($100 - $3) after
deducting $3. This incidence is called Re-Class. In this case, the Acquirer has
already funded the merchant with $97.5. So, $.5 ($97.5 - $97) would be an
operational loss to the Acquirer.

5. Interchange
Interchange is a process to exchange of Transaction details, money and other
information between member banks / financial institutions on a standard and consistent
basis. Exchange of transaction details between Acquirer and the Issuer happens via
AssociationCard networks.

Outgoing Interchange: Through the Outgoing Interchange Process (relative to the

Acquirer), Transaction details are sent out to the Issuer from the Acquirer via
AssociationCard networks. After Qualification of the transactions, the transactions are
grouped based upon the payment scheme or AssociationCard network (i.e. MasterCard,
Visa, Amex, Discover etc.) and then reformatted into AssociationCard network/Payment
Scheme specific format (e.g. IPM format for MasterCard, Base II for Visa). Then they are
run thru the AssociationCard network-specific Edit package (owned by AssociationCard
networks) to ensure the correctness of the Data. Once thru the edit package, the
transactions are sent out to the AssociationCard networks

Incoming Interchange: Once the AssociationCard networks receive the transaction

details, they re-qualify the transactions, split the transactions in different Issuing banks
and send the transaction details to the Issuer (processor). At the same time, they send
settlement reconciliation note, Transaction Reclass and Rejects details, Chargeback and

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Retrieval requests back to the Acquirer. These details come in to the Acquirer as part of
Incoming Interchange Process.

6. Posting
This is a process to post the financial liabilities to the Merchants account (i.e. updating
Merchants GL with credits and debits as per the daily sales, Fees, adjustments,
Chargebacks, Bill-backs etc.)

Posting to Merchants account takes place as a parallel process to Outgoing Interchange.

Posting process takes the feed from different area: a) Deposits (i.e. Sale, return, Cash
advance) and Merchant Adjustments from the Clearing Area b) Chargeback details from
Dispute system c) Feed from other systems (like Authorization, Equipment Maintenance
etc.) for Fee calculation
It calculates miscellaneous fees to be charged to the Merchant for providing different
services by the Acquirer (like, Authorization, Equipment maintenance, Statement, PCI
compliance, Tax calculation, Usage of some particular products provided by Acquirer
etc.). These fees are also called Invoice as they are invoiced to the merchants by the
Acquirer
It calculates Merchant Discount which is the fee paid by the merchant to the Acquirer
Processor for processing tractions acquired by the Merchants (it excludes other services
for which separate fees are charged). There are different rules of calculating this
Processing Fee or discount based on the contractual agreement between the Merchant
and the Acquirer (e.g. Three Tier Pricing, Grid Pricing, Minimum Discount etc.)
It calculates various fees that are charged by the AssociationCard networks to the
merchants. Some examples :
Assessment : This is the fee charged to the merchants by the associationcard
networks based on daily transactions processed
Cross-border fees: This is the fee charged by the associationcard networks for
providing currency conversion service for the cross-border transactions (where
Issuers currency is different from the Merchants currency and the transaction
needs to be Authorized in issuers currency)
Network and Bandwidth usage fee: This is charged by the associationcard
network to the merchants for using their networks during Authorization and
settlement.
After calculating various fees/invoices for merchants, the Posting system creates the feed
for Merchants funding. This includes the Net settlement Amount (Sale - Refund + Cash
advance), all the fees and Merchant Discounts (Interchange Fee, Miscellaneous Fees,
Merchants processing fee i.e. Discount, Assessment fees), Merchant Adjustments,
Chargebacks (to be debited from Merchants account) etc. In some cases it holds certain
fees which are to be released(i.e. to be charged to the merchants) later
It also creates the feed for Statement Generation process and Settlement warehouse
system which store the Merchants posting and Funding details. This in turn creates the
feed for Portals where merchants can view their Posting and Funding Details.

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4.3.3 Settlement Process

To participate in MasterCard and Visa's settlement systems member banks must open an account
at a specified bank. Both MasterCard and Visa use a small number of major banks to carry out
their settlements.
At a specified time and date the member banks are debited or credited at the settlement banks
for the net balances outstanding for each of their settlement currencies. When the cardholder's
account is debited and the merchant's account credited depends on business decisions taken by
the member banks, the payment card products used, and the size and type of merchant.

The settlement of a Credit Card transaction involves the following steps:

Payment associationcard network consolidates files from all acquirers for a particular issuer
and also the chargeback for all acquirers. AssociationCard network calculates the payment due
to all issuers and acquirers and transmits files to member banks. This gives issuer the amount to
be charged to a particular customers account. On the basis of this amount issuer makes a
posting to cardholders account.
Issuing bank will send amount due to settlement bank. Settlement bank will disburse the funds
to merchants bank; merchants bank will pay the merchant for the purchase. Issuing bank will
receive the money from the cardholder.
Settlement is done at a particular date and time when member banks are credited or debited at
the settlement bank for the outstanding amount. Acquirer puts merchant payment on hold in
case of suspected / fraudulent merchants. Acquirer processor sends funding advice to Acquiring
banks at Merchant Level for Merchant level Funding as per the payment schedule and payment
mode (ACH, Bank wire, Check)

4.3.4 Merchant Funding

Funding is a part of the settlement system. Funding process deals with payment of funds to the
merchants bank account. Steps can be summarized as following

Receives the merchant level summary from posting

Performs Consolidation process (e.g. Hierarchy based Payment: Chain or Outlet,

roll-up of different payment items etc.)

Determines the frequency of payment, destination account number, currency of

payment

Determine whether the merchant payment is to be put on hold by flagging

suspect transactions.

Example:

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Funding exclusion - Dont pay the merchant till the time funds are
received

Escrow Account - Certain portion of merchant funding is held back as an

insurance against fraud. This can be done only up to a certain amount

Effect payment by crediting the merchants Bank account as per the payment
Schedule (e.g. Monthly, Weekly, Daily). The amount is held until the merchant
funding cycle arrives.

Funding might take place thru ACH (automated Clearing house), Bankwire or
Check

4.4 Merchant Statement

Every merchant is sent a periodic processing statement at a periodicity specified in the
agreement with the merchant. The statement details a breakdown of all batch, deposit, and fee
activity. Report helps the merchants to reconcile. It covers funding, chargebacks and retrievals,
point of sale, outlet status and statement.

For statement generation, transactions from Posting and funding are matched to see whether a
transaction is funded or not. Process then identifies the merchants for whom the statements
need to be generated as per their statement cycle. Different categories of data are extracted for

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those merchants: Deposit, Chargeback, fee details, adjustments. Statements are printed and
dispatched and is loaded on to the Online system for Merchants view.

4.5 Dispute Processing

Dispute refers to a disagreement between an issuer and a cardholder. Cardholder may raise a
dispute when an erroneous transaction is posted in his or her account or cardholder has not
received the product or service they ordered for. Dispute is raised through the issuer. Card
networks are also involved in settling of disputes. Visa only allows one cycle of chargeback to be
raised whereas MasterCard allows two cycles of chargebacks. One cycle of chargeback means,
only once the requested is raised and resolved and the decision is binding, it cannot be
challenged again.

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4.5.1 Possible Reasons for chargeback

1. If a cardholder feels he has been wrongly charged for a purchase, he raises a dispute to
the issuer.
2. Issuer investigates the dispute. If issuer agrees, transaction is taken off from Customers
statement. Issuer bears the loss.
3. If issuer feels that issue was there at the acquirers end, Issuer raises a chargeback to
the acquirer through the associationcard network. Issuer may raise a retrieval request or
a chargeback request. Retrieval request is raised when issuer is not sure about the
dispute and wants additional information, if issuer is confirm that there is an issue from
acquirers side, he raises a chargeback. In real world scenario, retrieval constitutes only
around 10% of the scenario rest 90% consists of chargebacks.

Acquirers Fault
4. Acquirer investigates, if there is an issue at his end, he agrees and accepts the loss,
issuer is reimbursed. Once a chargeback request is raised, acquirer needs to respond
back within a certain time frame else acquirer may lose the right to content the decision
later.
Merchants Fault
5. In Step4, if acquirer finds there is no problem at his end, he passes it on to the Merchant.
Merchant investigates and bears the loss if chargeback is correct. Else merchant raises a
request for chargeback reversal, money flows from acquirer to the merchant.
6. If acquirer rejects the merchants request for chargeback reversal, he reclaims the money
back from the merchant. If acquirer is satisfied by the proof provided by the merchant, he
passes it back to the issuer through the associationcard network. Issuer then charges the
customer. Flow ends.
Issuers Fault
7. If acquirer believes he has sufficient ground to reject the chargeback, he raises a representment with all the proofs to the associationcard network. AssociationCard network
passes on the funds to acquirer till the time a final decision is made.
8. If associationcard network rejects the re-presentment, money is claimed back from the
acquirer else re-presentment is passed on to the issuer. Issuer claims money from
cardholder and passes on to the associationcard network.
If after chargeback and re-presentment, issuer & acquirer do not agree, the dispute
moves into arbitration phase. AssociationCard network is involved here. A committee of
judges is formed who decides on which party is liable to pay. The fee associationcard
network charges are pretty steep and hence Issuers and Acquirers usually prefer to
settle the dispute rather than taking it into arbitration.

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4.6 Merchant Servicing

Merchant Servicing
Merchant service is provided on-site or via a call center and could include such services as a
request for supplies or additional entitlement or infrastructure, a complaint about malfunctioning
POS device or a dispute about a chargeback. Acquirer needs to ensure that merchants are
provided with all materials necessary to effect transactions in compliance with associationcard
network rules. These materials may include POS terminals, PIN pads, advertising displays, and
other point-of-interaction promotional materials bearing the Service Marks.
Merchant Servicing can be broadly classified in to following five categories:

Loyalty Management
Self-Serve
Merchant Reporting
Terminal Management

Loyalty Management: This is one of the most crucial parts of merchant servicing as this is a
well-known fact that cost of acquiring a new customer is always higher than retaining the
existing ones. A Merchant with a high volume of transaction is always a boon for the Acquirer as
it results into higher revenue for the acquirer, thus the acquirer do a plenty of things in order to
retain the profitable merchants. The transaction data shared by Merchants is the key in
designing the loyalty program best suited to the Merchant. In addition to the customized loyalty
program, most of the acquirers offer a set of generic loyalty program like loyalty points, cash
backs, coupons etc. to retain a larger number of merchants.
Self-Serve:

A self-serve portal helps a Merchant to view his transactions, Statements,

Chargeback and also raise any request for necessary changes to his/her profile. Typically its a
customer portal which could be accessed by merchants using the login credentials provided by
the acquirer.
Merchant Reporting: The primary objective of the reporting team is to create customer reports
and make them available to the merchants. As per the terms within the merchant agreement
merchants are provided with the set of reports at the end of fixed interval (daily, weekly, biweekly or monthly etc.).
Some of the large merchants are also provided with the capability to design their own reports
which the acquirer created for them on a regular or one-off basis.

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Terminal Management: Once a merchant is on-boarded in the acquirer system, the merchant is
provided with POS terminal which has a terminal id (TID) mapped against it and the data is
stored in the Merchant database.
A merchant can make request for changes or updates to the POS terminal for which the TM
support team creates a case for the merchant and provide them with the new terminals or make
the updates to the existing one.
Any software updates to the terminal is owned by the hardware provider (Ingenico/VeriFone
etc.) and the roll up the updates to all the merchants based on the request from the acquirer.

5 Merchant Acquiring- Other Aspects

5.1 Trends
An increasing number of Acquirers are seeing high rates of attrition that we are looking to lower
and increase their revenue while with the advent of mobile and e-commerce a newer group of
merchants have come up which can be tapped by the traditional acquirer for their payment
processing. Customers are looking for more ways to get closer to their consumers by providing
sticky services that enable repeat business and higher spend per transaction. The Small and
Medium Business (SMB) space desires these services at a low cost in a simple non-transactional
business model that are simple to implement and use for their customers and personnel.
Additionally, SMB Customers are looking to leverage new advances in technology to easily
manage a core function that they do not have much time or experience in doing so.
1. Loyalty Evolution
a. Shift towards merchant-funded rewards programs
b. Merchant acquirers to start giving points to the types of merchants they want to
retain
c.

Focus on group coupon, mobile-based marketing, and merchant-funded rewards

2. Merchant Industry : Alliances/Acquisition

a. Developed markets, and in particular US, are experiencing severe pressure on
profitability in the acquiring business

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b. New players, such as payment services providers (PSPs), eWallets, processors,
and even terminal manufacturers, are entering the cards business. Some banks
are moving out, others are moving in, further increasing competition and driving
market consolidation.
c.

Multinational merchant want single card type which can work at all locations
forcing single acquirer presence or alliance to give streamlined service

3. Emerging payment channels

a. New types of channels emerging in online area. Players like Google, PayPal, etc.
also entering here with their own product
b. Acquirers to provide fully-integrated, multi-channel offering to the market as most
of the growth expected in the cards market in the coming years will come from ecommerce (CNP)
c.

A Focus on Providing Merchants with Multichannel Payment Services

d. Mobile payments and near field communications (NFC) are also rapidly gaining
in importance. These include mobile banking, mobile money transfers (person-toperson) and m-commerce (person-to-business)
e. Changing POS due to change in Card Technologies such as Contactless/ NFC
Based POS, Smart Cards, EMV cards
4. Secure Payments
a. Less disputes/fraud: Payments at Merchant location or online are becoming more
secure; the number of disputes in fraud has reduced drastically.
b. Most payment innovation is coming from non-banks. Banks need to change
culture to co
5. Regulations
a. Initiatives like SEPA & PSD disrupting long-established business models
b. Regulatory pressure on the payment networks & by extension their bank
members

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c.

forcing changes to pricing and profit margins

d. Introduction of unbundled merchant service charges (MSCs)

e. European acquirers will offer interchange plus pricing to many more merchants
than is currently the practice
f.

Acquirers are expected to start charging separately for individual elements of the
acquiring service, for example, automated clearing house rejects, chargeback's,
refund processing and statement fees.

6. Merchant Processing Cost

a. Authorization Costs and Transaction Processing Costs dropped by more than
10% - generating real savings for acquirers signing new deals
b. Merchant on File Fees are Dramatically Higher for Medium and Large Acquirers
c.

Customer Service and Terminal Help Desk Support Fees are Significantly Higher

7. Mobile Based Marketing

a. Mobile-based marketing company recruits customers directly, or via merchants,
and collects their mobile phone numbers.
b. The consumers specify what kinds of deals they would like to receive.
c.

Merchants decide when they want to send a deal to consumers and, if so, what
kind of deal they want to offer.

d. The merchant enters the offer on a web dashboard, and it is instantly sent to all
consumers via text message to all the consumers who have signed up for the
service.
8. Merchant Funded Rewards
a. A loyalty management company negotiates a deal with merchants and offers
these deals to an issuing bank or any organization that seeks to offer added
value to their membership base.

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b. The issuing bank has to pay for integration and for the transactions, and
merchants have to pay for integration and must offer some kind of a discount or a
special offer.
9. Group Coupons
a. Group coupons are internet-based coupon companies that bring new customers
or existing ones via a company's website, and which typically split the revenues
generated from coupons with the merchant.
b. However a lot of these merchants are taking a loss once they factor in the
overhead, the cost of the goods and services, and the staffing needs to fulfill the
orders.
c.

Merchants are, however, counting on the repeat business in order to generate

more sales in the future

5.2 Regulation Impact

AssociationCard networks have introduced more complex pricing in international
markets, while at the same time are facing increased regulatory challenges

Visa published interchange rates for the first time

V/MC published debit rates, Interchange seeking for profit structure, combination led to
strong merchant reaction

Department of Finance has indicated its intention to impose regulation of merchant fees
and/or practices

MC agreement with EU on intra-EEA interchange (consumer credit cards - 30bps; debit

20 bps)

MC will prohibit acquirers from blending pricing as between MC and other schemes

MC

will

continue

to

allow

differential

surcharging

between

debit/credit/consumer/commercial cards

MC has introduced pre-authorization related regulatory changes in European Union.

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MC

Merchant Acquiring

April 2009, the Senate approved pro-competitive banking reforms based on Toolkit
studies of credit cards and deposit accounts. In March 2010, the Chamber of Deputies
passed the final legislation.

Mexican Banking AssociationCard network has been regulating VISA / MC interchange

rates

The Australian Reserve Bank continues to maintain interchange fee regulation convinced
that conditions do not favor removal of regulation

5.3 Challenges to Acquirers

In the rapidly changing global payments landscape, merchant acquirers face increasing
challenges which bring new opportunities
1. Debit Interchange Fee Regulation
Australia became the leader in regulating the debit interchange fee by introducing a
regulation around interchange fees in 2006. In more recent years, other
countries/regions such as Canada, Europe and New Zealand also implemented a
series of reforms designed to improve interchange process transparency, foster
competition, and break the duopoly of Visa and MasterCard.
The Durbin Amendment, though relevant to the U.S. only, is a big step towards
increasing the transparency in interchange process. It can also be seen as a
trendsetter since the U.S. is one of the biggest markets for card transactions, and
regulatory authorities in other countries may follow the U.S.
In the U.S., the Dodd-Frank Wall Street Reform and Consumer Protection Act has
given regulatory power to the Federal Reserve to cap payment network interchange
rates for debit card transactions. The Fed will now also govern the rules that guide
merchant, processor, and bank routing of debit card transactions.
2. Challenge to Make Small Merchants PCI-DSS Compliant
Acquirers feel that merchants and sales representatives offer resistance to PCI
compliance due to the lack of complete understanding of the scope, need, and
benefits of PCI Data Security Standards (DSS). The non-compliance to PCI
increases the probability of card data breaches, which results in both financial and
nonfinancial repercussions including loss of reputation and customer trust.

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3. Competitive Threat from Non-Traditional Players
The payments industry is now rapidly evolving and new solutions are frequently being
introduced. Non-traditional players such as Square, PayPal, Apple, and Intuit, some
of whom may not have payments as their core business, are coming up with
solutions which are transforming the way payments are conducted. The new
solutions such as mobile card-readers including Square card-reader, PayPal
Here, and Intuit GoPayment, can be attached to iPhones and iPads. These card
readers eliminate the need to have point-of-sale terminals and merchant accounts for
small businesses, as they can process the transactions directly through these
instruments. These solutions are being accepted readily by small merchants because
of their ease-of-use and zero upfront investments.
4. Increasing Card Fraud in Card-Not-Present Situations
In 2010, global card-fraud loss increased by 10.2% to $7.60 billion as the global card
transaction volume registered an increase of 16.4% to reach $17.03 trillion11. The
rise in card-fraud loss has been relatively lower when compared to the growth in card
transactions. Fraud loss as a percentage of total card transactions has fallen due to
the continuous efforts by industry participants. However, the dollar amount of fraud
losses has increased with rising cost of fighting fraud. With the advancement of
technology, criminals are able to hack merchant/processor data-centers, making it
difficult for the industry participants to tackle the fraud. At the same time, the industry
is implementing measures such as PCI-DSS, EMV12 chip cards, and dynamic codes
for payment authorization to counter fraud.
However, in the U.S. which accounts for nearly 47% of global fraud losses13; the
response to EMV has not been at par with global growth, indicating that there is
further room for fraud loss to fall.
5. Merchant Attrition:
Merchant attrition has always been a challenge for acquirers; however the average
rate of attrition has increased after the financial crisis that began in 2008. The key
reasons for the increase in attrition are explained below:
6. Economic Slowdown

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The economic slowdown that began in 2008 resulted in loss of business for
merchants across the globe as consumer confidence became very low, resulting in
decreased sales and therefore losses for the merchants. The data from the American
Bankruptcy Institute also highlights the rise in bankruptcy filings which peaked in
2009 at 60,837, resulting in higher merchant attrition rates. After the downturn,
average attrition rates increased to 20% from around 16% in 200516. This increase
in attrition rate combined with high unemployment rate of 8.1% (April 2012) and low
consumer confidence added to the miseries of acquirers.
7. Durbin Amendment
The changes due to the Durbin Amendment will allow merchants to renegotiate their
pricing contracts with acquirers. In the process, merchants are likely to seek more
favorable terms from new acquirers and terminate existing contracts. This will act as a
further challenge for the acquiring industry, which is already facing customer attrition and
mass churn challenges.
8. EMV Implementation
In a recent survey conducted by Aite Group, 40% of the respondentsISOs and
acquirerscited EMVs potential to generate merchant attrition. The migration to EMVcompliant POS terminals also presents a potential opportunity to generate $6 billion in
revenues for ISOs and acquirers. However, there are operational and competitive risks
associated with the opportunity. As the acquirers will be dealing with a highly competitive
environment, desperate selling measures by acquirers may lead to pricing mistakes,
resulting in losses.

5.4 Areas of Focus

The fundamental challenge for acquirers globally is the commoditized nature of the services
offered. This commoditization has led to price wars and brought down acquiring margins to very
low levels, propelling the industry to opt for consolidation in order to leverage economies of scale.
Now, one of the only ways left to compete in this market is by increasing operational efficiency by
breaking technology silos and use of flexible systems; outsourcing of non-core activities; and
creating differentiation by offering innovative value-added services like analytics to customers. In

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Merchant Acquiring
addition, acquirers should focus on several key areas to enhance their competitiveness in the
market and address the prevailing challenges in the industry.

1. New Pricing Strategies

Acquirers generally price their services using one of three models: interchange-plus,
bundled pricing, and tiered pricing. Merchants generally prefer bundled and tiered pricing,
though the interchange-plus model is more transparent than the other two.
The interchange-plus pricing model is not preferred by merchants because it involves
complex calculations for the estimation of the acquirer fee. Further, the merchants do not
want to devote significant time to understanding such a complex system and prefer to
adopt simple pricing models.
The merchant charges vary across markets as additional services such as reporting,
troubleshooting, and charge-backs are priced differently in different markets.
Generally, in the case of bundled and tiered pricing, no distinction is made in pricing of
transactions based on card-type and/or transaction type; credit, debit, card present and
card-not-present transactions are priced the same.
On the cost front, acquirers generally go for a mix of fixed and bundled pricing contracts,
while outsourcing transaction processing services to third-party processors. This
approach results in higher fixed costs and impacts the bottom-line for acquirers. The
acquirers should therefore consider both the top-line and bottom line while designing their
pricing strategy.
The new pricing strategy should focus on increasing revenues and decreasing the overall
operational costs.
Analytical Pricing Capability
In their pursuit to acquire new business in the highly commoditized acquiring market,
acquirers generally lower their prices and, as a result, their profit margins become
negatively impacted. Acquirers can make well-informed pricing decisions using analytical
pricing techniques to acquire new customers as well as to re-price offerings for existing
customers. The analytics can help in adjusting their price levels to take into account the
margins, attrition data, and merchant industry type. This type of adjustment in prices can
help in increasing profit margins for acquirers.

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Effective Portfolio Management
Acquires should improve their portfolio management. This can lead to increased value as
the loss-making accounts are weeded out or re-priced. Also, the industry has developed
a rough consensus18 that three-tier discounting creates the highest margin opportunity.
In this pricing model, an acquirer quotes three discount rates viz. dubbed qualified, midqualified, and nonqualifiedwith interchange rates bucketed and associated with one of
the three discount rates. This results in significantly higher margins. We suggest that
acquirers should move some parts of the portfolio from interchange-plus to a tiered
pricing contract to increase their margins without increasing attrition.
Pay-Per-Use Model
Considering the business volume, instead of investing significantly in IT infrastructure,
acquirers, particularly smaller ones, should go with processors who earn their margin by
sharing the infrastructure with multiple members and who can take care of the end-to-end
acquiring lifecyclestarting from merchant boarding to disputes management. This will
help acquirers to leverage the benefits of economies of scale.
Further, volume-based, transaction-based, and profile-based payment contracts with
processors will help acquirers to cut costs, increase efficiency, and save them from
making huge investments for infrastructure as well as improving time to market for new
offerings.
Card-type Based Pricing
The decrease in interchange fees for debit cards, as a result of the Durbin Amendment,
has resulted in a shift in consumer preference towards using debit cards. To maintain
profit margins and pass on the benefits of the decrease in interchange fees to merchants,
acquirers should create new pricing tiers for debit card transactionsboth signature- and
PIN-basedat a price level lower than that for credit card transactions. Also, acquirers
can tweak tiered rates by putting debit and credit transactions in different categories and
setting different prices for each of the categories.
2. Technological Investment Areas
The next biggest focus area for acquirers is to invest in technology to cut operational
costs and improve efficiency. Technology investments should develop a highly flexible
merchant-acquiring system. Below, we discuss the key technological focus areas in
detail.

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Upgrade Legacy Systems
Acquirers legacy systems run on mainframes and were built over the years in fragments
as per the changing business needs. The systems are therefore not very flexible for
changing global requirements. Further, the maintenance and upgrade of such legacy
systems result in large expenses. Acquirers should migrate in one go to improved
systems through configurations that can support multi-country, multi-language, multicurrency, and multi-time zones.
Adoption of Flexible IT Systems
The acquiring industry has witnessed significant consolidation during the past decade,
which has resulted in acquirers having multiple IT systems. And, the applications running
on these systems usually work in silos. The un-integrated applications result in increased
maintenance cost and also hinder innovation. These multiple inflexible legacy systems
should be replaced with new systems in one go while managing the risk involved in
adoption of new systems.
System Innovations
For acquirers, moving towards open systems (such as Unix/Windows systems and Javabased programs that are platform independent) is a key need. Acquiring solutions based
on open systems can be built using modular architecture, which will make them highly
flexible to quickly adapt to a rapidly changing payments landscape (such as inclusion of
new channels and various regulations pertaining to fees).
Applications Innovation
There is room for innovation at both the systems level and the application level.
Innovative applications should have efficient back-office processing capacity along with
streamlined billing, clearing, settlement, and reporting capabilities, which will help
acquirers to manage their staff productivity and portfolio profitability. The innovative
solution should be able to align with growing security requirements, either to tackle fraud
or as a result of upcoming regulations such as 3D secure and SEPA. The system should
also have the capability to adapt in a timely manner to strategic changes around pricing
and other areas.
3. Multichannel Acquiring
Online commerce is growing rapidly and emerging as an important channel for retailers
across the world. Online merchant acquirers are blurring the lines between brick-and-

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mortar points-of-sale (POS) and online sales, extending services to merchants that go far
beyond payment acceptance. Most traditional merchant acquirers have not invested
heavily in online acquiring capabilities; as a result, there is much room for growth here.

5.5 Risk Management

Risk management deals with analyzing, measuring and assessing risk associated with the
Acquirer Processing business and develop strategies to mitigate the same.
Most of fraud risks & other risks that directly impact the card acquirer are described below

Merchant Collusion: This type of fraud occurs when merchant owners and/or their
employees conspire to commit fraud using their customers (cardholder) accounts and/or
personal information.
Merchant owners and/or their employees pass on the information about cardholders to
fraudsters.

Triangulation: The fraudster in this type of fraud operates from a web site. Goods are
offered at heavily discounted rates and are also shipped before payment. The fraudulent
site appears to be a legitimate auction or a traditional sales site. The customer while
placing orders online provides information such as name, address and valid credit card
details to the site. Once fraudsters receive these details, they order goods from a
legitimate site using stolen credit card details. The fraudster then goes on to purchase
other goods using the credit card numbers of the customer. This process is designed to
cause a great deal of initial confusion, and the fraudulent internet company in this manner
can operate long enough to accumulate vast amount of goods purchased with stolen
credit card numbers.

Kiting: Use of personal credit card by owner/employee. To generate false transactions

that are not linked to any merchandize sold, the owners of the outlets might swipe their
own cards. The intention is to get the funding from the acquirer processor for these
fraudulent transactions.

Split Sales: Splitting a single sale item. For example, a grocery store that now starts
selling jewelry in one of its counters. Since the amount involved is much more than the
usual value associated with a typical grocery store, the outlets split the sale amount of
multiple equivalent transactions to defy the ceiling imposed by the acquirer.

NDX (non delivery exposure) - Credit risk occurs for the acquirer because of extended
delivery timeframes. The acquirer keeps vigilance on the delays by the outlets in settling
the credit. An extended period would indicate that the merchant is short of funds and the
business is not doing well.

Non Delivery of merchandise: Sometimes fraudulent merchants (typically MOTO or ECommerce merchants) defrauded customers by taking orders with no intention to deliver.
When the consumers do not receive merchandise and file chargeback, they are be
covered by cardholder liability protection. Since the merchants could not pay, merchant
acquirer will be forced to make refund.

Chargeback Risk: A merchant acquirer suffers losses if a merchant is unable to make

good on credit transactions like chargeback. Chargeback amount is deducted from the
merchant pending the resolution of the case. If the dispute is resolved in the merchants
favor, only then the merchant recovers the funds. The merchant acquirer is at risk in the
event that the merchant fails between the time of the initial sale and the time his account
is debited for the chargeback. In this case, according to the card networks rules, the

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Merchant Acquiring
acquirer is liable and must make payment to the customer. Due to nature of the business
some business are prone to high chargeback like gambling, health club etc.

Delayed Delivery Risk: Some business (e.g. airlines, magazines) takes upfront payment
before the goods or service are delivered to the consumer. If these merchants fail during
the time between time of purchase (e.g. ticket booking) and delivery of products or
service (e.g. departure date) then the acquirer is liable to pay for the refunds to
consumers.

5.5.1 Type of Risks

Credit Risk occurs when a merchant is unwilling or unable to settle charge-backs and
other debit, due to reasons such as bankruptcies, business failure, or migration to
another processor etc. With proper risk management such merchants can be detected
early enough to stop the business with a fraudulent merchant.

Fraud Risk occurs when a merchant is engaged in fraudulent activities like generating
periodic Return transactions on a specific credit card. If the risk management process is
in place then the merchants are warned with consequences and a certain percentage of
their funded money is withheld as guarantee money. They are monitored for some time
frame and then money is released to merchants account. Sometimes the processing fees
are increased as a penalty for such activity. The aim is not to stop the business with the
merchant but to take a decision to minimize the loss for the acquirer due to such
activities. For fatal frauds, the business relationship with the merchant can also be
terminated.

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5.5.2 Risk Mitigation

Risk management deals with storing data from different transaction types such as authorization,
transaction and collection and recovery and then running rules against them to try and identify
any potential fraud. Rules need to be continually refined to be able to identify new methods by
which frauds are committed.
Rules flag the potential cases which look as fraud to be analyzed. These cases are queued for
risk analysts to have a look at.
Risk management system also communicates with card associationcard network and credit
bureau in order to receive or pass on some data related to fraud.
Some Risk Mitigation Measures:
Merchants are warned to not engage in any fraudulent transactions or to ensure better
fraud control.
Funding withheld as guarantee money. If merchant risk is high, acquirers may hold back
the funding money as a guarantee
Processing fees increased for merchant with high risk as risk premium
Relationship terminated with fraudulent merchant or with high possibility of future fraud

6 Merchant Acquiring Revenue Model

6.1 Merchant Account
Type

Description

Example

Retail Merchant
accounts

Offers Lowest Transaction Fee as long

as the following conditions are met: (i)
Card is swiped (ii) Signature is obtained
(iii) Batch is closed within 2 hours

Restaurants,
Stores, etc.

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Grocery

Merchant Acquiring

MOTO Merchant
Accounts

Mail Order Telephone Order accounts

tend to charge a higher transaction rate
and are used when credit cards cannot
be swiped. Merchants usually process
credit card payments by entering the
credit card information directly into the

Mail
Order
Catalogs,
Subscriptions, etc.

terminal
Internet
Merchant
Accounts

Internet merchant accounts are similar to

MOTO accounts, but can be used only
for internet transactions. Merchant with
internet accounts use a virtual terminal
or payment service gateway to process
card payments

6.2 Pricing Drivers

Page 49 of 59

Amazon,
etc.

EBay,

Letsbuy,

Merchant Acquiring

6.3 Processing Fees

Fee Type

Description

One Time Set-Up Fees

Application Fee

Many acquirers charge an application fee to cover processing costs,

including credit check. It is usually not refundable if the application is
denied. Acquirers who do not charge an application fee often charge other
higher fees to compensate

Set-up Fee

A setup fee usually includes hardware or software installation. Acquirers

who do not charge set up fees may charge ongoing fees for software and
hardware they lease to the Merchant.

Hardware Fee

Point-of-Sale (POS) terminals are used for real-time transactions. Some

vendors lease the terminal for a monthly fee

Software Fee

Software sends the card transactions to the Acquirer across a dedicated or

protected telephone line.

Security Deposit

Security deposits and Rolling reserves are sometimes charged to start-up

businesses, bad-credit merchants or high-risk industries.

Early
Fee

The early termination fee can be charged by some providers if the

merchant ends the contract before the end of the contract term

Terminal

Fee Type

Description

On Going Fees
Monthly Fees

Merchants have to pay a regular monthly fee. Some Acquirers expect the first
months payment up front

Merchant
Discount
(MDR)

A merchant discount rate, or discount rate, is applied to every electronic

payment transaction and is composed of two distinct rating categories:
interchange fees and merchant fees.

Rate

Interchange fees are set by credit and debit card associationcard networks
and are the largest component of the MDR. Banks deduct interchange fees
from every electronic payment transaction, representing 70 percent to 90
percent of the fees. Both interchange and merchant fees may be established
as a percentage of each transaction, a fixed charge per transaction, or a
combination of these two (referred to as a blended rate).
Authorization
Fees

If the credit card processing terminal goes down, the Merchant dials a voice
authorization number to process orders. Some, but not all, companies charge
a fee for this service

Monthly
Minimum Fees

If the MDR fee does not add up to the monthly minimum set by the Acquirer,
there is a Monthly Minimum Fee charged to the Merchant.

Chargeback
Fees

Chargeback are any customer credits for returned items, mis-orders or fraud

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Mobile Payment
Service Fees

If a merchant wants to be able to use a mobile in order to accept payment,

they have to pay a setup fee

Recurring
Payments
Service Fees

Many businesses like to have recurring billing capabilities in the event that
they accept regular orders or subscriptions. In order to set this up, payment
gateways charge a one-time fee

Fraud
Protection
Service Fees

Fraud screening software that automatically stops questionable transactions

is available through some Acquirers

6.4 Pricing Structures

Type
Three

Tier

Merchant
Account

Rate

Sub Type

Benefit

Qualified Discount Rate/ Transaction

2nd

Mid Qualified Surcharge/Transaction

Structure

Non-Qualified Surcharge/Transaction

ERR

Qualified Discount Rate/ Transaction

Merchant

Account

Rate

Structure
Interchange
Plus

Pricing/

Pass

through

Pricing

Non-Qualified Surcharge/ Transaction

Qualified Discount Rate/ Transaction

Most

profitable

for

Merchant Processor

Most profitable for the Merchant

Processor

Best for the Merchant

Mid Qualified Surcharge/Transaction

Non-Qualified Surcharge/ Transaction

6.4.1 Three- Tier Merchant Account Rate Structure

Sub Type

Example

Merchant

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the

Merchant

Merchant

Merchant Acquiring
Cost

Processor

Processor

Cost

Profit

Processor cost

$0.07

charged 1.69%

is

$1.83)

made and the

which

$100.00*1.65%

card is swiped

$1.69

which

on

the

transaction fee

$1.65

terminal.

The

of $0.21, for a

transaction fee

merchant

will

total of $1.90

of $0.18, for a

Qualified

$100.00

Transaction

purchase

is

Merchant

is

equals
plus

Charged

($1.90-

equals
plus

total of $1.83

Qualified Rate
Mid

Qualified

Transaction

$100.00

Processor cost

$0.52

charged 2.44%

is

$2.13)

made and the

which

$100.00*1.95%

card

key-

$2.44

which

into

transaction fee

$1.95

the terminal (In

of $0.21, for a

transaction fee

case of phone

total of $2.65

of $0.18, for a

purchase
is

entered

order

is

Merchant

is

equals
plus

OR

($2.65-

equals
plus

total of $2.13

terminal cannot
read the card).
The merchant
will

charged

with

Mid-

Qualified Rate
Non-Qualified

$100.00

Transaction

purchase

Processor cost

$0.97

charged 3.19%

is

$2.43)

made and the

which

$100.00*2.25%

card is swiped

$3.19

which

on the terminal

transaction fee

$2.25

with signature.

of $0.21, for a

transaction fee

The merchant

total of $3.40

of $0.18, for a

is

Merchant

is

equals
plus

will be charged
the

Non

equals
plus

total of $2.43

Qualified Rate

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($3.40-

Merchant Acquiring

6.4.2 Enhanced Rate Recovery (ERR)

Sub Type

Example

Qualified

Transaction

purchase

Merchant

Merchant

Merchant

Cost

Processor

Processor

Cost

Profit

Processor cost

$0.07

charged 1.69%

is

$1.83)

using

which

$100.00*1.65%

card

$1.69

$100.00
is

made
personal

Merchant

is

equals
a

which

and the card is

transaction fee

$1.65

keyed

of $0.21, for a

transaction fee

total of $1.90

of $0.18, for a

on

the

terminal with no

plus

signature.

equals
plus

total of $1.83

Non-Qualified

$100.00

Transaction

purchase

is

made

using

business

($1.90-

card

Merchant

is

Processor cost

$1.03

charged

is

$2.43)

1%ERR which

$100.00*2.25%

qualifies

which

as

equals

and the card is

non-Qualified

$2.25

Keyed

transaction

transaction fee

on

the

terminal with no

passed

signature.

The

2.25% totaling

merchant will be

to 3.25 plus a

charged the Non-

transaction fee

Qualified rate

of $0.21, for a

($3.46-

plus

of $0.18, for a
total of $2.43

total of $3.46

6.4.3 Pass through Pricing

Sub Type

Example

Merchant Cost

Merchant

Merchant

Processor Cost

Processor
Profit

Qualified

A $100.00 purchase is

Merchant is charged

Processor cost is

$0.25

Transaction

made and the card is

PT + 0.20% + $0.11

$100.00*1.65%

$1.83)

swiped on the terminal.

which equals $1.69

which

Page 53 of 59

equals

($2.08-

Merchant Acquiring
The

merchant

will

charged Qualified Rate

plus a

transaction

$1.65

plus

fee of $0.10, for a

transaction fee of

total of $1.75 plus

$0.18, for a total

0.20% of $100 plus

of $1.83

$0.11

totaling

to

$2.08
Mid

A $100.00 purchase is

Merchant is charged

Processor cost is

$0.25

Qualified

made

personal

PT + 0.20% + $0.11

$100.00*1.95%

$2.13)

Transaction

card and the card is

which equals $1.95

which

key-entered

into

plus a

$1.95

terminal

(In

case

phone

order

using

the

transaction

equals
plus

of

fee of $0.10, for a

transaction fee of

OR

total of $2.05 plus

$0.18, for a total

terminal cannot read the

0.20% of $100 plus

of $2.13

card). The merchant will

$0.11

charged

$2.38

with

Mid-

totaling

($2.65-

to

Qualified Rate
Non-

A $100.00 purchase is

Merchant is charged

Processor cost is

$0.25

Qualified

made

business

PT + 0.20% + $0.11

$100.00*2.25%

$2.43)

Transaction

card and the card is

which equals $2.25

which

swiped on the terminal

plus a

$2.25

with

The

fee of $0.10, for a

transaction fee of

be

total of $2.35 plus

$0.18, for a total

0.20% of $100 plus

of $2.43

with

signature.

merchant
charged

will
the

Qualified Rate

Non

$0.11

transaction

totaling

equals
plus

to

$2.68

7 Glossary
Acquirer: A licensed member of MasterCard and/or VISA (or its agent), which maintains
merchant relationships, receives all bankcard transactions from the merchant, and initiates that
data into an interchange system.
Acquiring Bank/Merchant Bank: The bank that does business with merchants enabling them
to accept credit cards. A merchant has an account with this bank and each day deposits the

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($2.68-

Merchant Acquiring
value of the day's credit card sales. Acquirers buy (acquire) the merchant's sales slips and credit
the tickets' value to the merchant's account.
Acquiring Processor: The processor provides credit card processing, billing, reporting and
settlement, and operational services to the acquirer. Many financial institutions hire a third party
for more cost-effective bankcard processing.
Affinity Card: A credit card issued in conjunction with an organization or collective group; for
example, profession, alumni, retired persons associationcard network. The card issuer often
pays the organization a royalty.
Arbitration: The procedure used to determine responsibility for a chargeback-related dispute
between two members.
Assessments: Fees paid quarterly by members to VISA and MasterCard to support marketing
and operating activities.
AssociationCard network: An organization owned by members, which services and obtains
processing services for members and functions as a principal/proprietary member of VISA or
MasterCard.
Authorization: The act of ensuring the cardholder has adequate funds available against his or
her line of credit. A positive authorization results in an authorization code being generated, and
those funds being set aside. The cardholder's available credit limit is reduced by the authorized
amount.
Authorization Request: A transaction request sent from an Acquirer, Processor or a Merchant
to an Issuer Member for Approval.
Bankcard: A financial transaction card (credit, debit, etc.) issued by a financial institution.
Batch: The accumulation of captured (sale) transactions waiting to be settled. Multiple batches
may be settled throughout the day.
Billback: A means of recovering or reducing interchange fees for transactions clearing
differently than planned. The processing company (FDC) passes through the charges to the
merchant.
Capture: Converting the authorization amount into a billable transaction record within a batch.
Transactions cannot be captured unless previously authorized and the goods or services have
been shipped or transmitted to the consumer.
Card Issuer: 1) The financial institution or retailer that authorizes the issuance of a card to a
consumer (or another organization), and is liable for the use of the card. The issuer retains full
authority over the use of the card by the person to whom the card is issued. 2) Any bank or
organization that issues, or causes to be issued, bankcards to those who apply for them.
Charge Per Transaction: A fee charged on any authorized transaction to cover costs usually
associated with delivery of the authorization.
Chargeback: A transaction that is challenged by a cardholder or card issuing bank and is sent
back through issuer to the merchant bank for resolution.
Chargeback Period: The number of calendar days (counted from the transaction processing

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date) during which the issuer has the right to charge the transaction back to the acquirer.
Chargeback Reason Code: A numerical code, which identifies the specific reasons for the
chargeback. VISA and MasterCard each have their own chargeback codes.
Clearing: The process of exchanging financial transaction details between an acquirer and an
issuer to facilitate posting of a cardholder's account and reconciliation of a customer's settlement
position.
Credit Scoring: A method for predicting the credit worthiness of applicants for credit.
Cycle Period: A specific period of time during which both debit and credit transactions are
accumulated for billing.
Debit: A charge to a customer's bankcard account.
Debit Card: Any card that primarily accesses a Deposit Account.
Debit Transaction: A transaction used to purchase goods and services or to obtain cash, which
debits the cardholder's personal deposit account directly.
Decline: The denial of an Authorization Request by, or on behalf of, an Issuer Member.
Expiration Date: The date embossed on a bankcard, beyond which the card becomes invalid.
Funding: Refers to the payment to a merchant for his submitted deposits.
Good Faith: An attempt to resolve a dispute regarding a violation of the AssociationCard
network Bylaws and Rules by written communication, before filing a compliance case.
Hard Decline A decline from the issuer where the card is invalid maybe due to fraud.
Hot Card: A card account on which excessive use is occurring often an indication that the card
(or account number) has been stolen.
Independent Sales Organization (ISO): Also called a member service provider. An outside
company (not MasterCard or VISA member) which is contracted by members to administer
merchant and/or cardholder servicing.
Interchange: It is the fee charged levied by issuer to the merchant, every time a consumer
swipes a credit or a debit card. Interchange usually forms the largest chunk of fee assessed to
the merchant.
Issuer / Issuing Bank: The financial institution (a licensed member of MasterCard or VISA),
which holds contractual agreements with and issues cards to cardholders.
Issuer Processor: Any Processor that receives a request for Authorization of a Transaction
from the Switch and/or authorizes Transactions on behalf of an Issuer Member.
Japanese Credit Bureau (JCB): Issuers of the JCB card.
Kiting: Use of personal credit card by owner/employee. To generate false transactions that are
not linked to any merchandize sold, the owners of the outlets might swipe their own cards. The
intention is to get the funding from the acquirer processor for these fraudulent transactions.
Merchant: A retailer, or any other person, firm, or corporation that, according to a Merchant

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Agreement, agrees to accept credit cards, debit cards, or both, when properly presented.
Merchant Acquirer: A member that gets merchants on board to start accepting cards.
Merchant Agreement: The written contract between merchant and acquirer who detail their
respective rights, responsibilities, and warranties.
Merchant Fraud: The act of submitting sales drafts which are not the result of legitimate sales
for the purpose of defrauding the services, the client bank, or individual cardholders. Fraud
includes knowingly accepting lost, stolen, or counterfeit credit cards.
POS Terminal: A device placed in a merchant location that is connected to the bank's system or
authorization service provider via telephone lines and is designed to authorize, record, and
forward data by electronic means for each sale.
Retrieval Request: A request by the issuer to the acquirer for a copy of the actual ticket of a
transaction. The initial step that the issuer takes in the event that either the issuer or the
cardholder disputes a transaction.
Settlement: Actual transfer of funds to the Merchants account net of all fees, chargebacks or
any other charge.
Settlement Statement: A document issued to the merchant, indicating the sales and credit
activity, billing information, discount fee and chargebacks (if any) occurring during a particular
time frame (one week, one month).
Smart Card: A plastic card resembling traditional credit or debit cards that contains a computer
chip; the chip is capable of storing significantly more information than a magnetic stripe. It is less
prone to fraud.
Soft Decline: Card number is valid but is still declined by the issuing bank. A declined response
in which authorization is not granted on a valid card, not because it has been stolen or lost, but
because the credit card already exceeds the credit line.
Switch: An electronic mechanism that routes transaction data from a point-of-sale terminal to
the authorizing data processor for approval of the card-issuing institution.
T&E CARD: Travel and Entertainment card issued by a private, non-bank company which deals
directly with the cardholder and merchant and which generally requires payment in full monthly.
Third-Party Processing: Processing of transactions by service providers acting under contract
to card issuers or acquirers.
Ticket: Another name for the sales slip or its 'monetary value' that results when a credit card
purchase is made.
Valid Date: The date embossed by the card issuer on the credit card. An establishment cannot
accept a card for payment of goods or services prior to this date.
Visanet: The data processing systems, networks, and operations used to support and deliver
authorization services, exception file services, and clearing and settlement services.

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8 References

Card Acquiring Overviewv0.6- By Abhinav Sinha

Merchant_Acquiring_Training_V1.15 -By Vikram Luhadiya

Acquirers And Tech Companies Join Forces On Mobile Payments by Ed McKinley, ISO
& Agent, 9 August 2012. http://www.isoandagent.com/news/Acquirers-And-TechCompanies-Join-Forces-On-Mobile-Payments-3011567-1.html

Acquirers: 3 Trends to Track in 2012 by David Fish, Mercator Advisory Group, 9 March

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Merchant Acquiring
2012. http://www.paymentsjournal.com/Blog.aspx?id=10613&blogid=206

Mobile Payments: Threat or opportunity? by David Heun, Payments Source,29 August

2012. http://www.paymentssource.com/news/Mobile-Payments-Threat-Or-Opportunity3011747-1.html

Acquiring: The New Pricing Puzzle, by Lauri Giesen, Digital Transactions, November
1,2011. http://digitaltransactions.net/news/story/3374

Benchmarking Level 4 Merchant PCI Compliance: The Acquirers Perspective, by

ControlScan, January 2012 http://www.electran.org/white_papers/AcquirerStudy2012.pdf

Ecommerce Transactions Dominate Mergers and Acquisitions, by Chris

Kampe,Multichannel Merchant, May 22, 2012,
http://multichannelmerchant.com/ecommerce/ecommerce-mergers-acquisitions-0522jt9/

How Merchant Processing Works, IP Pay, http://www.ippay.com/index.php?

q=merchant_processing_overview

ISOs Becoming Merchant Aggregators To Combat Square, PayPal, by Ed

McKinley,Payments Source, April 12, 2012 http://www.paymentssource.com/news/ISOsBecoming-Merchant-Aggregators-To-Combat-Square-PayPal-3010333-1.html

ISOs See Upside To Incursions Into Industry, by Autumn Cafiero Giusti, Payments
Source,January 24, 2012, http://www.paymentssource.com/news/ISOs-See-UpsideIncursions-Into-Payments-Industry-3009303-1.html

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