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The Following Parties Are Involved in Payment Card Transaction

The document outlines the key parties involved in a payment card transaction: [1] Cardholder, [2] Merchant, [3] Independent Sales Organization (ISO), [4] Acquiring Bank, and [5] Issuing Bank. It then provides details on the roles and relationships between each party. Specifically, it describes how merchants work with acquiring banks or ISOs to accept card payments, how funds flow between the banks, and common types of fees involved including interchange and merchant discount fees.

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Mahesh Malve
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534 views5 pages

The Following Parties Are Involved in Payment Card Transaction

The document outlines the key parties involved in a payment card transaction: [1] Cardholder, [2] Merchant, [3] Independent Sales Organization (ISO), [4] Acquiring Bank, and [5] Issuing Bank. It then provides details on the roles and relationships between each party. Specifically, it describes how merchants work with acquiring banks or ISOs to accept card payments, how funds flow between the banks, and common types of fees involved including interchange and merchant discount fees.

Uploaded by

Mahesh Malve
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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The Following parties are involved in payment card transaction –

1. Cardholder or Customer

2. Merchant

3. Independent Sales Organization (ISO)

4. Acquiring Bank

5. Issuing Bank

1. The Merchant

A business is referred to as “the merchant" once it has been authorized by the


acquiring bank, ISO {Independent Sales Organization], or other financial institution
to accept payment cards. It is essential for merchant to have its account with the
bank.

Banks work with businesses to enable them to process and


accept credit card payments by providing businesses a “merchant account”. This
service is provided in exchange for processing fees and depends on
creditworthiness of the party.

2. Independent Sales Organization (ISO)

ISO is a third party between merchant and the acquiring bank. The Merchant who
can not get merchant status from the bank may get merchant status through ISOs
for which merchants have to pay fees or percentage of the sales.

There are various advantages of attaining merchant status through ISOs. For
instance-

1. It offers credit card processing

2. Flexibility –Merchant account through ISOs are more flexible as compared to bank

3. It is very useful for high risk merchants.

3. Acquiring Bank

A bank that has a business relationship with a merchant is known as acquiring bank.
The Acquiring Bank accepts the sales slips from the merchant and credits the
merchant’s account after deducing fees or commission.

4. Issuer Bank

Issuer bank is a financial institution which issues payment cards to the customers.
The Customer or card-holder maintains an account with issuing bank.
Merchant Discount or Merchant Service Commission (MSC)
Merchant discount is percentage of sales merchant pays to the acquiring bank as
commission for the processing of the payment card transaction.

Interchange and Interchange Fee


Interchange is a transaction between acquiring bank and issuing bank and
interchange fee is paid by the acquiring bank to the card issuing bank for the
processing of transaction. It is usually a percentage of total sales.

Flow of a bank card transaction


Purchase transactions that are made with bankcards, generally operate on four
party payment systems. Here, each party plays a critical role in the transaction.

Cardholder – Customer of a financial institution who have been issued card against
the money he or she hold with the financial institute like banks.

Merchant – In simple terms merchant is seller of a goods or services to the


cardholder. Merchant gets cash payment in his account which he holds with
acquiring bank after the transaction with the cardholder is over.

Card issuer – Card issuer is a card issuing bank to the customer.

Merchant acquirer - The financial institution which charges MSC [Merchant


Service Commission] to the merchant is known as acquirer. This same institution
makes payment to the merchant. Usually merchant hold an account with acquiring
bank.

The below diagram explains the purchase transaction process. Here there are two
financial institutions – the card issuer (card holder’s bank) and the merchant
acquirer (Merchant’s bank). They act as the providers of purchase transaction
services to consumers. Both the cardholder and the merchant can be treated as
‘consumers’ of payment transaction services.

Depending on the payment market, there is fifth party also involved in bankcard
transaction such as Visa or MasterCard, which directly or indirectly facilitates the
transaction. The interaction between the four parties (issuer, acquirer, cardholder
and merchant) is done through a system which is maintained and supported by this
fifth party like Visa or MasterCard.
‘ON US’ and ‘NOT ON US’ Transactions
In some cases card issuer and merchant acquirer is the same entity. Such
transactions made by customers at its own merchants are called ‘on-us’
transactions.

Whereas if the issuer and acquirer are separate entities such as two separate banks
,the transaction is termed as ‘not-on-us’ transaction .It is also called interchange
transaction as the acquirer bank have to pay the issuer bank a interchange fee.

Closed loop system


It is a system in which the card issuer has entered into a relationship with both
cardholders as well as with merchants. In this system only three parties are
involved viz. Merchant, cardholder and issuer, hence this payment system is
also called as ‘Three Party System’.

Companies like American express, Diner Club, Discover follow this


system. This system increases efficiencies and reduces cost.

The below diagram shows that card companies like American Express has a direct
contact with cardholder /customer and merchant for payment settlement and there
is a flow of funds from cardholder to merchant via Card Company. For the services
provided by the Card Company the cardholder and merchant have to pay fees.
There is also transaction of goods and services from merchant to cardholder after
proper authentication
Sources of Revenue for Merchant Acquirer or Acquiring Bank -

Merchant acquirer collects fees from the merchant which is the primary source of
the revenue for acquiring bank. This fee is called merchant discount or merchant
service commission (MSC) or merchant service fee (MSF). Figure 2.3 explains the
revenue sharing between different financial institutions.

Authorization
Authorization is the process of checking the availability of sufficient funds
available to cover the amount of transaction and verify that the card is authentic
and not reported stolen .An authorization number [five digit number] for every
transaction is generated. Figure 2.4 explains authorization process.
The Cardholder/customer presents the card to the merchant. The merchant
forward this request to merchant bank via POS (point of sale) equipment.
Merchant bank forward this request electronically to issuer bank using card
association networks like VISA in this case .Issuer bank checks the validity of the
card and for authorized customer. For payment it is again routed to merchant
bank through card association network.

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