One recurring fact that we encounter on a daily basis when setting up new clients is the great confusion they have in general about the merchant processing banking system and how it all works. What is the difference between a processor and merchant bank? Are they the same or different? And what is an ISO or MSP? Why are they setting me up with a different bank for my merchant account? In this article, we will lay out in most basic terms the ins and outs of this system and hopefully, with this knowledge we will help you save money as a merchant on your future partnership decisions.
Basic Overview of the Merchant Banking Industry Structure
This whole system can be quite complicated and there are entire books written about it. We are going to lay it out in a bare bones way that will give you enough perspective to understand how the whole thing works.
Basically, you have two sides to the coin when talking about the credit card processing industry. The 'issuing bank' who issues credit cards to the consumer and the 'acquiring bank' who underwrites the merchant's account. We will be focusing on the 'acquiring bank' aspect as that is where most of the confusion comes from.
Originally, back before the electronic credit card processing boom of the 80's the 'issuing bank' and 'acquiring bank' were often the same. One would go to their local bank for a credit card and the local merchants used that same bank as well. However, with the rise of electronic terminals and POS systems, 3rd party non-bank companies who had a better grasp of these new technologies started to play a bigger role in the industry and many smaller banks got out of the game. As these 3rd party 'processors' took over more of the industry then began to partner up with certain banks to form joint ventures.
This was mutually beneficial to both parties as it gave the banks access to these new technologies and the processors access to millions of new accounts. Hence, you had the creation of the 5 super entities: First Data (which has Chase, Chase Paymentech and Wells Fargo as partners), BA Merchant Services, Nova Systems, Fifth Third and Global Payments. These entities have about 90% of the market share, leaving only a small 10% to everyone else. They have the power and while they can be good to work with if you are a billion dollar corporation, they make most of their money off screwing the little guy. (Approximately 98% of US merchants in 2004 processed less than $100,000 in annual credit card sales and yet they made up for over 42% of the acquirers' net revenues.)
This can also be very confusing when shopping around for rates because each of these partnered entities markets on their own and often uses sub-marketing companies called ISO's (more on these in a moment) to sell their products. So, when shopping around, it is always crucial to make sure you know who the actual bank processing your funds is. Is it a processor/bank mega venture that you will be dealing with or a smaller more personalized bank that will be more focused on your personalized needs? This can be very difficult to narrow down because many times while it seems like you have found a company that fits that bill, they are really just marketing for one of the 5 mega banks.
What is an ISO/MSP?
An ISO or MSP is a 3rd party company who is registered respectively with Visa/Mastercard and a sponsoring member bank to market, setup and maintain new merchant accounts. Most banks use multiple ISO/MSP's to increase revenues and bring more business to them. This is primarily what most people see when searching and comparing rates online. There are thousands of these companies.
The unfortunate reality for many merchants these days is that they were signed up with a particular ISO/MSP that works for a bank who is partnered with a processor. This is where all of the confusion, heartache and frustration often comes from when having to deal with customer service, gateway switches, rate disclosures, etc. There are so many parties involved the merchant often gets lost in the shuffle!!
How can this knowledge help me as a merchant?
In understanding how all this works, you as the merchant now have the knowledge to really think about and investigate all aspects of the merchant provider's relationships before signing their contract. Is this small local company just a working front for one of the big boys and if so, will their customer service be effected by this? Will you have have to call 3 different institutions to get a straight answer about something like PCI compliance fees or your shopping cart integration?
Ideally, life would be best for the merchant if we could all go back to the old days of a single bank relationship across the board. However, just because this isn't the reality today, it doesn't mean merchants can't still find something close to that. There is still that 10% of banks doing business the old fashioned way with customer care and a personal approach as their focus point. Your local bank, for example might have a great merchant service option that doesn't include one of the big boys like First Data.
There are also situations where your technology provider may be involved with the bank as well; killing two birds with one stone. PayJunction, for example, is both the gateway provider and an ISO/MSP of First National Bank of Omaha which is one of those remaining 10%. The benefit of this system is that you get a company who is in control of both your processing software and merchant account (1 customer support to call) and who works directly with one of the smaller banks who isn't tied with a large processor. Less people in the chain typically means less of a headache and more savings for the merchant. Contact us today for more info on this.
