For many years, banks enjoyed a monopoly over offering merchants credit card processing services, otherwise referred to as providing businesses with merchant accounts. It was the banks that maintained individual merchant accounts, housed the processing platforms, handled authorization and connections to the major credit card companies. Over time, the processing rates they offered to businesses looking to accept credit cards became higher and higher as they realized they were the only game in town. Eventually, the need for third-party processors arose as banks realized that supporting everything from A-to-Z wasn’t as profitable to them as it was cumbersome. Banks still play a major roll when it comes to processing credit card transactions, and it’s true that you can still obtain a merchant account through your local bank. However, savvy business owners take time to evaluate all their options before deciding whether to maintain a merchant account with their bank or with a third-party merchant services provider.
Here are some things that a MSP (merchant services provider) can offer you that your bank may or may not handle:
1. Authorization: When a credit card transaction occurs, a processor acts as the “middle-man” between a merchant’s acquiring bank and a buyer’s/customer’s issuing bank. They make sure that each transaction is authorized against the purchaser’s credit limit, route the request to the appropriate card association (Visa/MasterCard/Discover/AMEX), and receives and transmits batch deposits for each merchant on a daily basis. Each third party processor has to be certified and connected to the major credit card companies in order to conduct business.
2. Fraud Detection: Third party processors can provide services that monitor transactions for potential fraudulent activity. This watchdog feature, where a processor’s software “red flags” transactions that don’t seem to make sense, helps prevent credit card fraud. For example, if you use your card to purchase a pack of gum at your local convenience store in Boise, Idaho and then, one hour later, that same card is used to buy a fur coat in Tampa, FL, the software that your processor uses will flag that transaction and attempt to prevent the counterfeit transaction from going through.
3. Chargebacks: A chargeback is what happens when an error occurs while entering the transaction data, when an item or service arrives to the customer not-as-described or damaged, when a customer did not receive an item or service they paid for, or when there is an identity theft occurrence where card information is stolen and used to make fraudulent purchases. Chargebacks need to be resolved, whether it is the customer or the merchant at fault, and it is the third party processor’s duty to resolve them. They are a huge inconvenience and can cost a processor (or bank) a lot of money due to their merchant’s errors. This is why any credible MSP will have a risk department that evaluates whether a merchant should be approved for a merchant account, essentially based on chargeback and fraud risk.
4. Settlement: A third party processor can clear transactions after authorization. When a transaction takes place, a merchant doesn’t just receive the amount of the sale immediately. It has to go through authorization, interchange, and approval from the banks. There’s a whole transaction cycle that takes place before a merchant receives funds. At the end of each day, a merchant batches their terminal (sends out an information data file of all their transactions for that day) and sends the batched file to their processor. The processor reviews that file and sorts the transactions by card type and assigns rates to each transaction based on card type. After the processor completes all this “behind-the-scenes” work and within a certain period of hours (usually 48-72), a merchant will receive a deposit into their bank account for the amount of that day’s transactions.
Some banks can act as a direct processor by partnering with a payment processing platform. This allows the bank to focus on what its core strengths are and not invest millions of dollars into the technology required to maintain its own platform.
So why not go directly to your bank? Why even look at a third-party processing solution or a merchant services provider? First of all, just because they’re a bank doesn’t mean they’re entitled to better processing rates. They offer merchant accounts so that they can add an additional revenue stream to their bottom line (aka: they’re out to make a profit), just like any other business.
Your bank may end up offering you the best rates when you’re shopping for a merchant account, but they won’t extend extra value-added services that many of the upper-echelon merchant services providers will be able to supply you with. When choosing a third-party processor, see what other services they can offer you and your business. Some offer website development, marketing services, promotional materials, business cash advances and gift card/loyalty programs that your bank will not offer. These services are generally provided at super-discounted rates in hopes that you’ll sign up with that particular MSP in order to take advantage of their affordably priced business solutions. Especially if you’re a start-up, those little extras can add up in savings, while saving you time and the hassle of obtaining these services from alternative companies.
My personal recommendation would be to decide whether you need the extra services a third-party processor, or MSP, can provide. If you’re a new business, I would recommend you take advantage of their offerings because, more than likely, you won’t be able to find those services cheaper elsewhere. Next, shop around to find out who can offer you the best processing rates. The number of transactions you process each month and your monthly processing volume will generally be the determining factors when getting rates from multiple companies. Do a mini-background check to verify the legitimacy of your “Top Three” processors to make sure they’re on the level. Beware of processors that don’t disclose their addressed location, as they could be fly-by-night operations attempting to appear larger than they really are. Make sure you read your processing agreement carefully to avoid any misunderstandings and unexpected fees down the road. Choose what solutions works best for you based on your business’s unique needs.
2010 Lorraine Wolfe