The payment industry is difficult to understand, even for practitioners. My 3-part series on credit card processing hopefully demystified jargon, pricing models and fees.
This post will explain trading accounts.
It is normal to be confused about payment processing, gateways and business acquisitions. The industry relies on confusion to charge fees that might otherwise be called into question.
As with card processing, you help to choose the best supplier account for your company to understand how the fees for trading accounts are created and assessed.
"Acquirer", "merchant acquirer" and "acquirer bank" refer to the same thing: a financial institution that has been registered and approved by one or more of the card brands (Visa, Mastercard, Discover, American Express) to accept card payments on behalf of a merchant.
Many acquires are banks, but not always. Some financial institutions that are not banks have become acquirers, and some independent organizations working on behalf of the acquirers call themselves acquirers.
Many acquires are banks, but not always.
An acquirer can perform several functions. Some perform all of the following; others only a few.
- Marketing and sales. Acquirers are companies with customers – merchants, in this case. Buyers market their services and conduct sales activities to register merchants.
- Underwriting. Acquiring banks mainly provides loans to their commercial customers. Banks must evaluate the borrower and implement risk mitigation strategies, as with all loans.
- Create and manage trading accounts. A trading account is not a savings or checking account. Rather, it is a special type of bank account that temporarily holds the income from credit and debit card payments.
- Interact with payment processors. This feature creates a lot of confusion. An acquirer is not necessarily a payment processor. However, acquirers can offer many services, including payment processing. For example, Bank of America Merchant Services offers both merchant accounts (acquisitions) and payment processing. Some acquirers have partnered with several suppliers (eg processors, payment gateways, outlets) to offer a single solution for merchants.
- Authorize transactions. Merchant acquiring also participates in approving (approving and rejecting) payment transactions. Although other organizations also approve transactions (processors, card brands and issuing banks), the acquirer has the final approval. This is how it works.
When a customer purchases with a credit card, the payment portal (provided by the payment processor) sends the transaction to the card brand (eg Visa). Before that, however, the processor usually checks for fraud and gives initial approval. The credit card verifies the transaction (again, usually a fraud check) and, if approved, is transferred to the issuing bank (assuming the credit card to the paying customer), which verifies that the cardholder's account has sufficient funds. If yes, the issuer approves and then notifies the acquirer. The acquirer has the last word again: deposit money into the merchant's account or reject the transaction.
The acquirer carries the financial risk. If it approves a transaction that later turns out to be invalid (usually a refund), the acquirer must repay the issuing bank, which then replaces the cardholder. Deposits to trading accounts come from the acquirer, not from the issuing bank. Thus, deposits into trading accounts are short-term loans from the acquirer to the bank.
- Arbitrattvister. When a merchant fails to provide the customer with the goods or services promised, it is the acquirer who is financially responsible. This applies to refunds and to traders who expire (or disappear) without placing orders. For repayments, the acquirer will withdraw money from the seller's seller account, if the seller has not disappeared. But sometimes recoveries are taken incorrectly. Customers may be wrong or deceptive. Consequently, the acquirers offer dispute resolution, arbitration and settlement services.
Card brands do not allow anyone to accept credit card payments without a merchant account.
A merchant account temporarily has the revenue from credit and debit card transactions. It is again a type of bank account, but it is not a savings, checking or money market account. A trading account cannot be used to pay expenses, payroll funds and so on.
Once a credit or debit card payment has been approved, the acquirer will deposit the revenue minus the processing fees (exchange, evaluations and set-up) in the trading account. Each acquiring bank has its own deposit scheme. Some acquirers make deposits in near real time. Others take up to three days or longer.
Merchants can usually check their accounts within 24 hours of a sale and confirm that they are scheduled to receive the revenue and transfer it to a separate business account.
Where do the acquirers get the money to make deposits into trading accounts? It is through a process called "clearing and settlement" – a nightly reconciliation between issuing and acquiring banks that owe each other money. Buyers are obligated issuers for recovery; issuers owe the acquirer the revenue from today's sale.
Why can't businesses deposit credit and debit card payments directly into their checking accounts? Without separate trading accounts, it would be difficult (and a legal nightmare) for the issuing banks and card brands to withdraw money and fines from a regular bank account in the event of recoupment or poor merchant behavior.
Therefore, trading accounts primarily benefit the acquiring and issuing banks, which can hold a merchant's funds to protect against recovery and other risks.
Types of sales accounts
While the acquirers offer many types of trading accounts based on risk, transaction volume, access to money and pricing, there are two main categories: dedicated and aggregated (shared).
Dedicated trading accounts only serve one business with a unique account number. Leading suppliers of dedicated trading accounts in the US include FIS (including Worldpay, a recent acquisition), Chase Merchant Services, Fiserv (formerly First Data), Bank of America Merchant Services and Global Payments (including TSYS, an acquisition).
Aggregated trading account providers are technically facilitators. Examples include PayPal, Square and Stripe. Payment Manager creates a master trading account with an acquirer and then assigns merchants to sub accounts. As with dedicated trading accounts, the rules for payment managers are created, maintained and maintained by the card brands.
Payment simplifiers have become popular for a number of reasons.
- Cost savings. Payment Managers create and maintain only one trading account. The revenue from each merchant's transactions is deposited into this account. Payment simplifiers can transfer these savings to their retail customers.
- Faster approval. Customers of payment simplifiers undergo less scrutiny and guarantee than for dedicated accounts. Participating merchants get started quickly with fewer obstacles, less paperwork and easier contracts.
- Simple fees. Merchants of payment simplifiers are almost always charged lump sums for transactions, which are easy to understand and predict. The disadvantage is that lump sums in total can be more expensive. (I dealt with treatment fees in “Part 2” in my previous series.)
- Fewer restrictions. Customers of payment managers usually avoid long-term agreements and excessive termination fees. Merchants can take their payment acceptance business elsewhere (and quickly), if needed.
Given the benefits of payment simplifiers, why would any merchant want a dedicated trading account? The answer has to do with fees and services. Payment Simulators offer merchants an easy, cost-effective way to get started. But for merchants with higher transaction volumes (more than $ 4,000 a month, roughly), flat pricing is likely to be more expensive than other pricing models, such as interchange-plus.
Here are some benefits of dedicated trading accounts:
- Pricing. Many dedicated trading account providers support the exchange pricing model, which generally offers the best and most transparent payment processing pricing.
- Faster retreat. The insurance and risk reduction policy is much more stringent for dedicated trading accounts. Therefore, the acquirer usually allows merchants to withdraw money from dedicated trading accounts much earlier than payment simplifiers – usually 2 days for dedicated accounts versus four to seven days (usually) for payment managers.
- Better service and support, potentially. One can expect that dedicated trading accounts will receive a higher level of service from the acquiring banks. However, I have seen excellent service from payment simplifiers and terrible services from acquirers providing dedicated accounts.