Interchange-Plus Model Basics

There are several different pricing models, used by credit card processing companies today, and interchange plus is one of the most popular among them. The way it works is very simple. A credit card merchant processor simply adds its mark-up to the interchange rates that are published regularly by Visa and MasterCard and the result is what the merchant pays as a card processing cost. So if the interchange rate for a Visa CPS/Retail Credit card is 1.54% + $0.10 per transaction and the credit card transaction processing provider has a mark-up of 0.30% + $0.15 per transaction, the resulting rate will be 1.74% + $0.25 per transaction and that is what the merchant will be charged.

Merchant services providers can use one mark-up for all interchange rates or, which is more often the case, different mark-ups for different types of cards. For example, if a payment processing services provider wants to offer the same discount rate for both Visa and MasterCard credit cards, it will have to use different mark-ups, as the interchange rates, used by each Credit Card Association, are different.

The interchange plus pricing does not apply to Discover and American Express rates. In fact, none of the pricing models, used by the payment processing companies, applies to them. Both Discover and American Express set their own pricing and mark-ups are not allowed.

Dealing with Invalid Chargebacks

In order to eliminate frivolous customer disputes and invalid chargebacks, the Credit Card Associations of Visa and MasterCard have implemented sophisticated verification systems that significantly reduce chargeback levels and greatly improve the chargeback process. When Visa or MasterCard detect an invalid chargeback, it is automatically returned to the card issuer that originated it, and the merchant and merchant services provider never see it. Many credit card processing companies (including UniBul) also have systems that routinely review exception items, allowing them to resolve issues before a chargeback is necessary. Together, these systems ensure that the chargebacks that you receive are legitimate or that only you can respond to them.

Even though the chargeback verification systems are becoming ever more sophisticated, there is still a chance that an invalid chargeback may find its way around them and into your merchant processing statement. In addition, a chargeback may be cleared by the Credit Card Associations' verification systems, as it meets their requirements, and still be invalid. In these cases you should follow through as quickly as possible and represent your supporting evidence to proof that the credit card processing charges were valid.

Although invalid chargebacks cannot be completely eliminated, you can significantly reduce their number by following certain payment card processing best practices. Ask your merchant account provider for assistance in implementing these best practices into your organization. If the levels of invalid chargebacks remain consistently high, even after all of your efforts to contain them and all of the assistance that you have received from your merchant account provider, it may be possible that your processor simply lacks the expertise to address the issue and your best option may be to switch to another payment processor. Be sure to do your due diligence when researching your prospects and consider all aspects of the service. Contact merchants who are currently using your prospect's merchant services and evaluate their level of satisfaction. Keep in mind that the right processing partner can save you money and help grow your business.

E-Commerce Merchant Account Set-Up

Setting up an eCommerce merchant account (here is our solution) is pretty similar to establishing a manual credit card processing service, with a few notable exceptions. You will need the following:

• A functioning website. This requirement is self-explanatory and does not require a comment.


• A SSL Certificate. You need the SSL to ensure that the information that your customers provide is handled in a secure way and it is protected from identity thieves.


• A shopping cart. This is the service that collects your customers' purchase details and payment information. It integrates into your website which is usually done by the person who builds the website. There are a great number of shopping carts out there, some of which you can get for free. It can also be built by your developer. Each choice has its pluses and minuses and the decision on which one to select should be made on a case-by-case basis.


• An eCommerce payment gateway. A payment gateway is the service that connects your shopping cart with your credit card merchant processor and transmits the payment information. It usually is offered by your internet credit card payment processing provider. It serves the exact same purpose that a physical terminal does, and it performs the same range of functions.


• An internet merchant account. This is the service that will enable you to accept credit card transactions and other electronic forms of payment. It links all previously mentioned components into an inter-related system and is your connection with your merchant services provider and the Credit Card Processing Networks of Visa and MasterCard. There are many providers out there and you should have no problem locating them. It will be a good idea to request several proposals and compare the terms before you make your decision.

I have not talked about pricing here, as it has been discussed in great detail in other credit card processing articles. I would like to remind you, however, that you should always evaluate the whole merchant account processing pricing proposal and not just the single rate or fee that usually gets advertised.

Payment Processing Bank

There are several participants in the credit card transaction processing cycle: a card holder, a merchant, a processing bank, the Associations of Visa or MasterCard, and a card issuing bank. The processor (e.g. UniBul), also referred to as the acquirer or the merchant bank, is the financial company that provides the merchant with credit card processing capabilities and acquires its transactions. Acquiring of transactions in this case means that they fund the merchant the transaction amount, minus the processing cost, and then submit a payment request to the bank that issued the card, used to make the payment.

Every credit card merchant processor is a member of Visa and MasterCard and is usually a card issuer too. Credit card processing companies rarely offer merchant account processing services directly to businesses. They work with Independent Sales Organizations and Member Service Providers and underwrite the accounts they sign up. Processing banks have the last word on whether or not a merchant will be approved for a credit card processing account and will suspend it is not used properly and according to the processing agreement.

Underwriting Merchant Accounts

Underwriting of small business merchant accounts is done by banks that are members of the Credit Card Associations of Visa and MasterCard. The underwriting process consists of evaluating the risks, associated with allowing a merchant to accept credit cards through a detailed analysis of the applicant's credit history and the business' previous processing history (if applicable). Banks want to make sure that applicants are responsible entities, because, in effect, a merchant account processing service is a form of credit. When a merchant receives a card payment, it is authorized, cleared and settled by the credit card merchant processor. At the end of the business day the processor receives the transaction information and funds the amount, after subtracting its processing costs, into the merchant's checking account. Then it waits for the card issuing bank to remit the payment amount. At this point, if the issuer or their cardholder disputes the transaction, initiating a chargeback, or if it turns out that the transaction was fraudulent, the processor may never receive its money. In addition, if a merchant generates a consistently high level of chargebacks (over 1%), the Credit Card Associations will assess fines on the credit card processing company that has underwritten the account.

Merchants usually receive their processing service from Independent Sales Organizations. These are licensed by the Credit Card Associations and have relationships with creditcardprocessing banks. Once a processing agreement is signed, the processing bank, also known as a merchant bank or acquiring bank, commits to acquiring the merchant's card transactions and funding the transaction amount minus the processing costs. Processing banks are usually card issuers as well.

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Acceptance of Foreign-Issued Credit Cards

It is important to understand that Visa and MasterCard are global institutions and credit cards that bear the logo of either one are accepted in every store or ATM that accepts that type of card. It does not matter where the card has been issued. The difference is in the processing rates that merchants pay for accepting cards issued abroad. Credit card processing companies, licensed to provide US-based small business merchant accounts, settle the funds in US dollars. Payment cards, issued abroad, on the other hand, use the local currency. When a credit card processing transaction is authorized and cleared, the funds will be settled in US dollars and a conversion fee may be charged to the merchant.

If you are going to be accepting credit cards, issued abroad, on a regular basis, you will need to make sure that you sign up with the right processor. It is important that, before setting up your merchant services credit card processing account, you check what your prospective credit card merchant processor's conversion rate is. You may find that a provider that offers higher processing rates, actually has the cheapest solution for your needs, because they don't charge any conversion or cross-border fees.

Merchant Account Reserve Basics

Reserve is a portion of the monthly revenue from a merchant’s card processing transactions that credit card processing companies (like UniBul) may request to hold in an escrow account as an insurance against possible loss from chargebacks and other sources. Used mainly with high-risk merchant accounts, upon satisfactory completion of a predetermined period, reserves are returned to the merchants. In the case of a rolling reserve, a reserve is held every month for a certain period (usually six months). On the following month the first month’s reserve is released to the merchant, and then the second month’s reserve and so on until there is no longer a reserve.

A reserve may also be requested if a merchant has a bad credit history, in addition to a personal guarantee. In cases where a reserve is required, the minimum reserve balance in the small business merchant accounts is set at about 20% of the anticipated credit card payment processing volume. New merchants are usually allowed to build up their reserve by sending in transactions which are not withdrawn until the minimum reserve balance is achieved; after that, the merchant is allowed to withdraw the excess funds for transfer to their checking account.

Every credit card merchant processor has a different underwriting policy, so it is a good idea that you request several credit card processing proposals before making a decision. It may just turn out that one of them does not have a reserve requirement.

What Does a Merchant Account Do?

Small business merchant accounts are customizable to fit each individual merchant's needs (we at UniBul certainly do that). All of them provide Visa and MasterCard acceptance for both credit and debit cards. Be sure to check what your debit card processing rates are. They should be substantially lower than those of credit cards. Discover card and American Express accounts are optional and your processor should set them up, per your request, at no charge. Both Discover and AM EX set their own rates and credit card processing companies have no control over them.

Every credit card payment processing account will also enable you to accept reward cards, fleet cards, private label cards, corporate cards, etc. In addition, you will have the ability to issue gift cards under your own brand name. This is a third-party service and every major credit card processing provider supports it.

Electronic check acceptance is another service that you can get with a business merchant account. It allows customers to enter their checking account information in your payment acceptance form and the funds are then directly debited and transferred to your checking account.

There are other payment processing services that are available to merchants, such as EBT acceptance, private label card issuance, stored value programs, etc.

Common Point of Purchase (CPP) Investigations

MasterCard may identify merchant locations at which MasterCard account data may have been compromised and subsequently used to effect fraudulent transactions at other points of sale. MasterCard will designate each such merchant location as a common point of purchase (CPP).

Card issuers may request that MasterCard initiate an investigation of a merchant for possible CPP activity at any time. Acquiring banks have five business days to acknowledge a request from MasterCard for a CPP investigation and 30 calendar days to complete the investigation. Failure to respond may result in fines or assessments.

Only MasterCard, not a member bank, may designate a merchant location as a CPP and request that an acquiring bank conduct a CPP investigation in accordance with the CPP program requirements. MasterCard will identify a merchant location as a CPP from one or more of the following sources:

• Information received from law enforcement and investigative authorities.
  
• Card issuers in accordance with the established criteria.
  
• MasterCard systems, databases, and any other source deemed to be reliable.

e-Commerce Merchant Account vs. Payment Gateway

An eCommerce gateway is a component of every credit card payment processing web-based merchant account. It connects the website's shopping cart with the merchant's processing bank and transmits the transaction information between them (see pricing details here). It serves the same purpose that physical terminals do. Every major payment processing gateway today comes with built-in fraud prevention services and AVS and CVV2 verification capabilities. It also stores credit card processing information for future reference and can be customized to produce transaction reports.

In order to set up a web-based small business merchant account you will need a functioning website and a shopping cart. Then you need to send out pricing requests to several credit card processing companies and review their offers. All of them will offer an eCommerce payment gateway as well. You can also buy the gateway from a third party and have it set up with the merchant services credit card processing provider's system. You should not pay application or set up fees and your monthly maintenance fee should not be higher than $15.

Bank Merchant Services Interchange

Bank merchant services interchange provides incentives for banks to issue credit cards and for businesses to accept them (see details). It is a fee that is paid by the retailer's bank (the acquirer or processor) to the customer's bank (the card issuer) and is designed to compensate the latter for the risks and costs it takes to manage its cardholder accounts. These include the finance costs for the interest-free period that lasts from the time a customer makes a sale to when he pays his bill, as well as for credit losses, fraud prevention and processing costs.

Setting the various interchange fees necessitates achieving a careful balance. If they are set too high, the bank merchant services user' desire for accepting bank cards will diminish. If interchange fees are set too low, on the other hand, the issuers' desire to continue issuing cards and maintaining cardholder accounts will decrease and so will the use of cards.

MasterCard and Visa periodically re-examine interchange fees to make sure that the rates provide to everyone involved: the merchants, the issuers and the cardholders. Each Association keeps dozens of different interchange rates that account for the differences between the various card programs, like e-commerce, gas stations or restaurants.

The discount rate that merchants pay when they accept credit cards is typically a small percentage of the cost of the products or services the retailer pays its bank when a card is used. It includes the interchange fee and is negotiated between the retailer and its bank. The Associations are not parties to these negotiations.

The Associations operate networks that facilitate the communications among four separate parties:

• The issuer markets and issues bank cards to customers and provides credit to cardholders from when a purchase is made until a payment is due.
• The cardholder uses the bank card to buy merchandise and services at millions of locations around the globe.
• The bank merchant services user accepts bank cards for the payment of products and services.
• The acquirer contracts with retailers and provides them with bank card acceptance and processing services.

By contrast, three-party systems, like Discover, charge discount rates that are often higher than the ones for accepting Visa and MasterCard cards. As three-party system providers act as both issuers and processors, they do not have to set interchange rates. They can use the fees collected directly from retailers to cover the costs for the issuing of the cards.

What Do PayPal and Starbucks Have in Common?

What Do PayPal and Starbucks Have in Common? by UniBul on 6/4/2012  PayPal's new mobile payments service launched in the U.K. last week, which enables customers to use their phones to check themselves out of participating stores, relies on the same technology that powers Starbucks' Mobile Pay, which launched in the U.S. in January 2011 and immediately turned into a runaway success. Read more.

Foursquare, AmEx Team up in U.K. to Help Brits 'Stumble Upon a Deal' by UniBul on 6/5/2012  A year after Foursquare and American Express teamed up to enable Americans to redeem specials at U.S. merchant locations, the duo has evidently been sufficiently pleased with the results to decide to test the concept across the pond in the U.K. And there seems to be something for everyone in this AmEx / Foursquare program. Read more.

M-Pesa and the M-Payment Boom in the World’s Most Troubled Places by UniBul on 5/30/2012  It is the sheer misery and lack of infrastructure that makes the world’s poorest and most troubled places the most fertile ground for M-Pesa, the mobile payment service that was first launched in Kenya in 2007, Peter Vanham asserts in his Financial Times blog. Among the countries that it has entered, M-Pesa has been most successful in the least developed ones. We explain why. Read more.

Why You Will Never Pay off Your Credit Card by UniBul on 6/1/2012  The good people at Cracked.com have discovered a new math, which helps them calculate that if you make the minimum monthly payment on a credit card debt of $10,679, 1,000 years from now your descendants will still owe $212 million on the account. Oh, and in 2,000 years Bank of America will finally destroy the Earth, presumably after countless near-misses. Read more.

Why Square Is Winning the Mobile Payments War by UniBul on 3/1/2012  Square has plenty of competition and at least one of its rivals - Intuit's GoPayment - has mounted a solid challenge, offering reliable service at rates that seem to be better than Square's. And yet, it is Jack Dorsey's card reader that is sold at an ever increasing number of retailers, ranging from Apple to Wal-Mart. And it is Square that is making the mobile payments headlines. Why is that? Read more.

About UniBul Merchant Services UniBul Merchant Services enables businesses and non-profit organizations to accept credit and debit card for payments quickly, securely and at a low cost. Learn more.