How does the trade in validating credit cards work?

[Stephen Tashiro]

How does the trade in validating credit cards work? Who pays whom for access to the information?

I think merchants pay information middlemen such as Paypal or First Merchant Data Services to perform credit card validations. (I don't know how the merchants computer system interfaces with such a service - whether the merchant must buy a special program or whether the merchant merely knows some data formats and passwords.) The middlemen deal with financial institutions that have the detailed information on a card. But who pays whom for access to this information? Does the middleman pay the bank? Or are the services of the middleman so valuable that the bank pays the middleman? And how does the company that holds the "brand name" of the card (like "VISA") get involved in this? (e.g.. How is "VISA" involved with the VISA card issued by the First National Bank Of Melverton?)

[Phil Thien]

I own a computer shop where I sell and fix computers.

I have an account with a processor. Processors are numerous, they are sometimes owned by banks (like Chase owns Paymentech, sometimes just referred to as Paymentech but often referred to as Chase Paymentech) or are individual financial institutions (like Heartland). They are sometimes resellers, where they contract with someone like Paymentech do perform the underlying processing, and add a markup.

I have a terminal (but could just as easily use software on a PC). I swipe the card, and the terminal connects to the processor and transmits the data from the magnetic stripe, along with my account #, and the amount I'm charging. The processor uses one of the networks to check with the card issuer's bank to authorize the transaction. If the transaction is authorized, an authorization number is returned and printed on the receipt, and saved by my terminal.

At the end of the day, my terminal "settles" with my processor. It connects to the processor, and transmits all the charges and authorization #'s. The processor takes this batch and it is used to collect the monies from the issuing card holder's banks. In the meantime, I get my money in 2-3 days.

Once a month, I am charged a percentage of the charges I cleared that month, referred to as the discount. The discount varies by type of card (Visa, MC, Discover, Amex all have different rates). In fact, different cards among a single vendor (like Visa) can have different rates. If a card has an incentive program, the discount rate is correspondingly higher. If it is a business card, the rate is also higher (because businesses tend to pay their balances every month so issuing banks ding me for some profit).

Discounts are split many ways, so my processor gets some, the card issuer gets some, the bank card consortiums get some, etc.

They make all this as complicated as possible (LOL) to make comparisons between different processors difficult.

[Steve Peterson]

My wife had a small business a few years ago and set up a credit card system through Costco. I think their system had the same rates for all VISA transactions. The transaction cost was always known up front. I don't remember if MC or Amex had the same rates as VISA.

Solicitors would come into her store offering to save her money by switching to their credit card processing service. They usually left quickly once she told them that she was using Costco, so it must be a really good rate.

Steve

[Phil Thien]

My wife had a small business a few years ago and set up a credit card system through Costco. I think their system had the same rates for all VISA transactions. The transaction cost was always known up front. I don't remember if MC or Amex had the same rates as VISA.

Solicitors would come into her store offering to save her money by switching to their credit card processing service. They usually left quickly once she told them that she was using Costco, so it must be a really good rate.

Steve

I haven't been so lucky.

Every processor that walks through my doors wants to see a statement. "We can give you a better deal."

From there it gets confusing. Because the processor has a "rate," but there are Interchange rates that are in addition. So although you may have a 1.3% rate, at the end of the month your charges exceed 1.3% because of additional fees. Here is a copy of my most recent statement, each of these is a line item with a separate rate (below). In the final analysis, all I can do is compare total average charges on a month to month basis. After my last change, total rates went down (expected), but then crept up even though my processor's rates didn't change, but all the Interchange rates keep going up.

They keep it confusing.

MasterCard Charges
MC COMMERCIAL DATA RATE 1 - BUSINESS CARD
MC ENHANCED MERIT III BASE
MC MERIT I DEBIT
MC MERIT III DEBIT
MC REGULATED POS DEBIT WITH FRAUD ADJ
MC DISCOUNT RATE
Total MasterCard Discount Fees

Visa Charges
VISA BUSINESS CARD - RETAIL
VISA CPS RETAIL CREDIT CARD
VISA CPS RETAIL DEBIT
VISA CPS REWARDS 1
VISA CPS SMALL TICKET DEBIT
VISA DEBIT & PREPAID REGULATED
VISA INTERREGIONAL ELECTRONIC
VISA SIGNATURE BUSINESS-RETAIL
VISA SIGNATURE PREFERRED RETAIL
VISA DISCOUNT RATE
Total Visa Discount Fees

Auth Fees
MC CNP AVS FEE 1
MC INTERNET NETCONNECT
VISA INTERNET NETCONNECT
Total Auth Fees

[Stephen Tashiro]

They keep it confusing.

That's even more confusing than a phone company bill.

It looks like the authentication service passes various charges from VISA on to the merchant. I still wonder who-pays-who for information access after we go beyond the merchant paying the authentication service. Does VISA pay individual banks? Or do the banks pay VISA? Or is access to the information at a bank free to "trustworthy" companies.