Credit Card Processors

Credit card processors are businesses, including but not limited to chartered financial institutions, that give merchants the ability to accept debit and credit card payments for goods and services. These services support a wide variety of transactions, from in-person and phone sales to the growing number of Internet purchases.

Over the past several decades, credit cards have become the preferred method of payment by all classes of people for all classes of purchases. Having what is termed “a merchant account” with a bank – or one of the new, flexible equivalent arrangements – is absolutely essential for any modern business.

Credit Card History in Brief

When Bank of America launched its BankAmericard in 1958 – which eventually gave birth to the Visa network – banks would issue credit cards as well as process them. For some time after that, credit card processing was only available from banks that were members of the Visa or MasterCard networks. This changed over the following decades and today very few banks issue credit cards.

Instead, the credit card processing industry has consolidated around just a few large “issuing banks”: Citibank, Washington Mutual, Capital One, MBNA/Bank of America and Chase. Few other banks process credit cards, as the industry had taken to offloading these services to companies known as Independent Sales Organizations, or ISOs. Financial analysts quickly discovered that the economies of scale reduced the cost of credit card processing, so banks continued to outsource the work, creating the first giant credit card processors in TSYS and First Data.

A small fraction of merchants still obtain card processing services from a bank, but it is much more likely today that a business will negotiate credit card processing services with an ISO.

Leading, full-service ISOs will sell the service to the merchant, implement the processes, provide technical support, assume the chargeback risk(s), authorize the transaction, submit it to the Visa or MasterCard network, and establish the pricing structure of the services. Smaller ISOs may outsource some of those services, like technical support, to a larger ISO. Also, outside of the very largest organizations, ISOs generally offload the actual processing to a larger, specialized firm that does only that.

Both banks and ISOs provide merchant accounts and could reasonably be referred to as credit card processors, but normally the phrase refers to whoever has the direct working relationship with the merchant(s).

Comparing Processor Firms

When selecting a credit card processor your first contact should be the bank you use for your business accounts. A bank with which you have an existing relationship is the most likely source for credit card services. Many offer comprehensive packages for businesses that include merchant services, despite the fact that most banks do not process card transactions themselves. If you do not have a pre-existing, positive relationship with a bank, however, it may be difficult to go this route. Banks will hold you and your business to a higher standard than third-party processors.

The next processor option is an ISO. When evaluating them remember that they are not as strictly regulated as banks are, so they range widely in quality and reputation – from reputable companies to fly-by-night firms. Be on guard when evaluating possible vendors, make sure you get the complete story, and always read the entire contract.

There are other intermediary firms that can help you secure your credit card processing with the biggest players, MasterCard and Visa, who make you apply through companies termed “financial service providers” to establish a merchant account. However, the American Express and Discover networks still allow you to sign up directly with them.

There are also numerous business and trade associations that offer credit card processing at discount prices. These groups are an especially good option if firms in your particular industry have had trouble obtaining credit card processing services historically.

Finally, there are offshore or international merchant accounts that may offer an option for companies that can’t secure service because of credit history, location or other reasons. These firms may offer low processing fees as well as flexible terms, but since they’re not regulated as U.S. credit card processors they might not offer the long-term dependability (or legitimacy) that you need.

Decision Criteria

Price is important, but it should not be the main determinant in choosing a credit card processor. Thoroughly review all the offerings from your list of credit card firms, and evaluate all the important aspects of their services.

Since problems, delays and errors in credit card processing can seriously affect your profit/loss statement, good customer service is essential. Ask for references from merchants that are similar to your firm in size and type of business. You want to know how long it takes to get customer service on the line, how the processor handles chargebacks, if they have phones staffed around the clock and whether or not they charge per incident.

If you do not have a secure server that will handle encrypted credit card transactions, make sure your processor can process with SSL (Secure Sockets Layer), a World Wide Web security protocol. It is both expensive and technically daunting to set up your own secure, transaction-friendly site.

It should go without saying that you should verify that the company you are considering is, in fact, legitimate. There are plenty of bunko artists who establish phony credit card processing firms just to collect account setup fees and then head for the hills. Check their reputation with the Better Business Bureau. If you find a credit card service provider offshore or on the Internet, obtain and verify a physical address and phone number.

Finally, here are a few pointers to help you find the right credit card servicing company for your needs:

  • Find out how long it takes for funds to be transferred.
  • Compare all fixed and variable fees.
  • Check and compare negotiable fees like set-up, cancellation and monthly minimums.
  • When you know all the fee rates, calculate what your total costs would be based on your best and worst recent months.
  • Read the contract thoroughly to understand all fees, charges, terms, conditions and termination specifics.
  • Overall, the best advice is to become as familiar with the companies and their various offerings as you possibly can. Use common sense, weigh all the facts, crunch the numbers – then make your decision and get to business.