Martin Cole
Key Takeaways
– The classical payment model consists of three steps: Authorization, Clearing, and Settlement.
– Payment Service Providers (PSPs) act as intermediaries between merchants and acquirers.
– Merchant acquirers not only process card payments but also offer value-added services to merchants.
– Pricing models for card processing can be blended or Interchange Plus.
Authorization, Clearing, and Settlement
The payment process begins with the Authorization step, where the customer’s bank is contacted to approve the transaction. This approval is based on fraud rules and the availability of funds in the customer’s account. The issuing bank, which is responsible for issuing cards to cardholders, plays a crucial role in this step.
Once the transaction is authorized, the Clearing step takes place. In this step, payment information is exchanged between the customer’s bank and the merchant’s bank. This exchange ensures that the necessary funds are transferred from the customer’s account to the merchant’s account. Payment processors facilitate this communication between banks and card schemes.
Finally, in the Settlement step, the customer’s bank pays the merchant’s bank for the transaction. The funds are settled to the merchant beneficiary, completing the payment process. The acquiring bank, which takes on the risk associated with fraud or non-delivery, plays a vital role in this step.
Payment Service Providers (PSPs)
Payment Service Providers (PSPs) act as intermediaries between merchants and acquirers. They manage connections and routing payments, making the payment process seamless for both parties. PSPs offer a range of services, including payment gateway integration, fraud prevention, and reporting tools.
By partnering with a PSP, merchants can access multiple payment methods and accept payments from customers worldwide. PSPs handle the technical aspects of payment processing, allowing merchants to focus on their core business operations. Additionally, PSPs often provide customer support and assistance in resolving payment-related issues.
Merchant Acquirers and Value-Added Services
Merchant acquirers not only accept and process card payments but also provide value-added services to help merchants run their businesses more efficiently. These services can include point-of-sale (POS) systems, inventory management tools, and analytics platforms.
By offering these additional services, merchant acquirers aim to enhance the overall payment experience for both merchants and customers. For example, a merchant acquirer may provide a mobile POS system that allows merchants to accept payments on the go, increasing convenience for both parties.
Furthermore, merchant acquirers often offer fraud prevention tools to protect merchants from fraudulent transactions. These tools use advanced algorithms and machine learning to detect suspicious activities and prevent unauthorized transactions. By leveraging these tools, merchants can minimize the risk of financial loss due to fraud.
Pricing Models for Card Processing
When it comes to card processing fees, there are two main pricing models: blended and Interchange Plus. In a blended pricing model, the acquirer charges a fixed percentage fee for each transaction, regardless of the card type or interchange rate. This model simplifies pricing for merchants but may not provide transparency regarding the actual costs associated with each transaction.
On the other hand, the Interchange Plus pricing model offers more transparency and granularity in processing fees. With this model, the acquirer charges a fixed percentage fee on top of the interchange rate set by the card schemes. This allows merchants to see the actual costs associated with each transaction and can help them make informed decisions regarding their pricing strategies.
Conclusion
The classical payment model involves multiple players and steps to ensure secure and efficient transactions between customers and merchants. Payment Service Providers (PSPs) act as intermediaries, managing connections and routing payments. Merchant acquirers not only process card payments but also offer value-added services to help merchants run their businesses more efficiently. Pricing models for card processing can be blended or Interchange Plus, with Interchange Plus providing more transparency. By understanding the payment process and the role of merchant acquirers, merchants can optimize their payment strategies and provide a seamless experience for their customers.
