Credit Card Processing Discussion at REST Fest 2011
An 11 min video talking about credit card processing from a web developer's point of view. Also, lots of notes and links from the research process. Recorded at REST Fest 2011
REST Fest 2011 \ Jim Ciallella \ FiveInFive from REST Fest on Vimeo.
Overview of How the System Works
- Gateway - interface between merchant and processors
- Processors - History Banks found that it was not within their skillset to convince every small merchant to accept credit cards, and they began to outsource the selling of such services to small companies called ISOs (Independent Sales Organizations). They also found that massive scale helped reduce the cost of processing credit cards, so they began to outsource processing to a few giant processors. Carl at First Data said, "banks don't do credit card processing. they outsource it to processing companies but they keep their names on it"
- ISO/MSP - reseller of processing services and merchant accounts
- Member/Sponsoring Bank - hold a risk escrow account for ISO/MSP's
- Debit Network - automatically selected by the processor based on the issuing bank
- Full Pricing, good API, combines gateway with Wells Fargo merchant acct
- $99 setup, $35/month
- Recurring Billing/Subscriptions
- .10 per subscription per month
- Requires the Vault @ $20/month + .01 per record
- Vault - method of storing Payment Profiles - $20/month + .01 per record
- Payflow Pro - your own merchant account and charges are done through an API
- Direct from Paypal - $249.00 - Monthly - USD $59.95 (Up to 1,000) $0.10 per additional transaction
- Via Heartland - $199 setup, $35/month, $95 application, .08 per transaction
- Recurring Billing/Subscriptions - $39.95 setup and $29.95/month
- Payflow Link - a hosted solution that works with a merchant account
- Website Payments Pro - over 10K/month - 2.2% + .30 -- $30 month. Gateway solution with no merchant account.
- PayPal Standard Payments - hosted solution with no merchant account.
- Customer Information Manager - CIM - method of storing Payment Profiles
- Recurring Billing/Subscriptions - Automated Recurring Billing - ARB
- Merchant Accounts Can be Sold Directly from Processor OR via reseller/ISO/MSP
- Relationship is between the processor and the merchant - and merchant account is setup and #/username/password is sent from processor to the merchant's email address
- Merchant Banks underwrite the risk of ISO/MSPs based on various factors and traditional banks also sponsor ISOs, but they don't actually do the processing.
- Annual or month subscriptions are higher risk than one-time charges or monthly recurring.
- A helpful list comparing Merchant Account Providers.
- Becoming an ISO requires a substantial investment, like $5000 year to Visa and $5000 to Mastercard
- Processors and ISOs have sales agent programs with lower barrier to entry. Processors will refer agent leads to larger ISOs . Gateways like Authorize.net have Resellers (large) and Reseller Agents who get commission of merchant account setup and recurring sales.
- ISOs (a small sample for the sake of comparing prices)
- PaymentMax - sells Authorize.net and GlobalPayments gateways
- BluePay - ISO/MSP and reseller for Wells Fargo
- NexCommerce - pricing
- Dharma - pricing
- GoEmerchant - $99 setup, $19.95/month, $29.95/annual, .10 per transaction
- The discount rates include the Interchange Rates + the Merchant Services Providers (MSPs) and Processors markup and "Network Costs" which are a function of the MSP/ISO's risk (if using an ISO)
- Interchange Rates vary by many factors, such as industry, credit vs debit, card brand, swiped vs card not present, signature vs PIN, and meeting rules like 2 day variance between authorization and clearing. These are published by Visa/Mastercard/AMEX and are the same regardless of the processor.
- Many MSPs and processors will bundle Interchange Rates into Rate Tiers charge qualified or non-qual, others further split into mid-qual.
- Qualified: regular cards with no rewards/miles/points
- Mid-qualified: rewards cards and some business cards
- Non-qualified: Most business cards and government cards. ex. First Data 2.99%
- AMEX: ex. First Data 3.5%
- Though AVS and CVV codes may not be required by the gateway the processor may charge a higher "non-qualfied" discount rates if these fraud protections are used.
- AMEX and Discover don't do Interchange as they act as both the card issuing bank and the merchant bank, so they keep all the
- ISO's Profit - LEPS .2%, $59 every February, doesn't normally charge a setup fee
- PCI Compliance Fee - processor may scan the website, but no fees (LEPS) $39.95 (non-profit) $99.95 (for profit)
- Gateway Fee - ex. $20/month Authorize.net
- Gateway Setup Fee - ex. Authorize.net $99, First Data Global Gateway $199
- Gateway Per-transaction Fee - ex. Authorize.net $0.10
- Merchant Account Authorization Fee - ex. First Data $0.29 (range is roughly $0.24-0.35) $0.30 seems to be mode
- Gateway Batch Fee - ex. Authorize.net $0.25 per batch
- Merchant Account Batch - ex. First Data $0.35 per batch, waived for non-profits.
- Monthly Services/Statement Fee - ex. First Data $10/month, waived for non-profits
- Interchange Fee + Authorization Fee (is the money there) +Transaction Fee (charge the card) = $.24 to $.30
- Monthly Minimum Processing fee - if variable transactions don't exceed this amount then you still pay it.
- Client side validation can save on authorization transaction fees by preventing failed authorizations
- Check length of card number 15 for AMEX and 16 for VISA, MC, Discover
- This Luhn algorithm checksum is used by all major credit cards.
- Fees Diagram - "For one example of how interchange functions, imagine a consumer making a $100 purchase with a credit card. For that $100 item, the retailer would get approximately $98. The remaining $2, known as the merchant discount  and fees, gets divided up. About $1.75 would go to the card issuing bank (defined as interchange), $0.18 would go to Visa or MasterCard association (defined as assessments), and the remaining $0.07 would go to the retailer's merchant account provider. If a credit card displays a Visa logo, Visa will get the $0.18, likewise with MasterCard. Visa's assessment is fixed at 0.0925% of the transaction value and MasterCard's assessment is fixed at 0.0950% of the transaction value. On average the interchange rates in the US are 179 basis points (1.79%) and vary widely across countries"