Credit cards are the beating heart of eCommerce, with consumers and online retailers depending on their buying power and practical benefits. Monica Eaton, the founder, and CEO of Chargebacks911, offers insight into the inner workings of a single credit card transaction and the roles, responsibilities, and standards financiers must adhere to.
TAMPA BAY, Fla., July 17, 2023 /PRNewswire-PRWeb/ -- There are more than 108.6 million credit card transactions that occur in the U.S. every day; globally, that figure is more than 1.01 billion. Behind each of these transactions is a myriad of intermediaries, processes, rules, and regulations of which many retailers are unaware. Monica Eaton, founder, and CEO of Chargebacks911, is providing merchants with the backstory to the credit card approval process to help them make informed decisions regarding payment processing, reducing the risk of chargebacks and helping to improve their card method revenue potential.
Facilitating a credit card transaction from start to finish involves some key players:
- The cardholder initiates a transaction at checkout and receives products or services from the merchant, which is paid for by the issuing bank. The cardholder repays the issuer for the transaction when they pay their credit card bill.
- The merchant is the store owner with whom the cardholder has initiated the purchase. The merchant accepts the buyer's credit card to facilitate payment for the transaction.
- The acquiring bank is the financial institution that enables the merchant to accept credit card payments and is responsible for depositing funds from approved transactions into the merchant's business account.
- The issuing bank is the cardholder's financial institution, which approves or denies payment authorization requests.(1)
- Payment processors act as the mediator between the acquiring bank and merchant and are responsible for sending and receiving transaction details and authorizations. (For many merchants, their acquirers act as payment processors, while others use separate entities.)
- The card networks (i.e., Visa, Mastercard, American Express, and Discover) provide the communication system issuing banks and businesses use to process credit card transactions. The card network accepts authorization requests from the merchant's acquiring bank, then forwards that information to the cardholder's issuing bank for approval.
A merchant account is required for businesses that accept credit and debit card transactions, as well as other electronic payments. The account serves as a conduit between a customer's credit account and a business's checking account.(2) To apply for a merchant account, a business must meet specific account qualifications, which include being a legally registered business in the U.S. and having a legal U.S. address and bank account. If qualified, applicants must provide specific documentation, such as their business license, business and personal financial statements, business and personal credit history, business profile, and marketing materials, which are each validated according to the payment processor's policies and regulated banking standards. They must also meet specific requirements, such as compliance with the Payment Card Industry (PCI) Data Security Standards (DSS).(3)
The five steps of the credit card payment lifecycle can be broken down as follows:
1. Authorization: The merchant requests authorization from the issuer. This initial request travels from the merchant to the payment processor via a payment gateway and the card network. The issuer verifies that the account is active and has the funds available.
2. Authentication: The merchant ensures the validity of the purchase using anti-fraud tools, such as an Address Verification Service (AVS), or by validating the CVV number on the card.
3. Submission or Batching: The merchant sends a formal request to the issuing bank for payment. Typically at the end of the business day, the merchant bundles and submits a group of transactions to the payment processor for sorting. The processor then forwards them to the acquirer.
4. Clearing and Settlement: The acquirer transmits the batched transaction data to the issuer, which then charges the cardholder's account and routes the funds back to the acquirer.
5. Funding: The acquirer receives the funds from the issuer and deposits them into the merchant's account.(1)
There are a lot of stops along the way during the credit card payment process, which increases the chances of sensitive cardholder information falling into the wrong hands. Payment processing companies must be compliant with strict data security requirements. Currently, the U.S. has no single federal consumer data privacy legislation preventing software vendors from sharing customer data; however, many states have developed their own. The major credit card companies require businesses to comply with the 12 security standards of the PCI DSS,(5) which has been widely adopted by financial institutions worldwide to protect payment systems from data breaches, fraud, and theft. Non-compliance with the PCI DSS requirements may result in fines of up to $100,000 per month, increased transaction fees, permanent termination of a merchant's relationship with their bank, and being added to the Merchant Alert to Control High-Risk (MATCH) list, which would permanently prohibit a company from processing card payments.(6)
In 2022, the average cost of a data breach in the finance sector worldwide was $5.97 million per incident.(7) A PYMNTS survey found that 65% of eCommerce customers would abandon a merchant entirely after experiencing a single data breach.(8) When selecting a payment processor, merchants should verify that they provide full-scale security when processing their transactions, such as PCI DSS compliance, an option for multi-factor authentication, insurance to cover worst-case scenarios, and a proven track record of staying current with the most up-to-date security technologies.(9)
Even after all the hurdles have been jumped, merchants may still find themselves having to forfeit revenue due to a return or chargeback, the latter of which can happen months after a transaction has been processed. Financial institutions issue chargebacks for their cardholders if a dispute arises between their customer and a merchant. The Fair Credit Billing Act of 1974 gives consumers the right to dispute charges, such as billing errors, unauthorized purchases, fraudulent activity, products or services that were not delivered, or purchases that were not as described by the merchant.(10)
Due to the commonplace nature of chargebacks, processors and acquirers pass down a fee or penalty, usually between $20 to $100 per incident.(1) Chargeback fees can accumulate over time to the point that they become unmanageable, and if a merchant receives an excessive amount of chargebacks, they can lose their merchant account. When a customer succeeds in filing a chargeback, which card issuers have been pressured to make much easier to do, the merchant loses the cost of the purchase and any additional administrative fees/fines that banks may impose. With chargebacks, the customer may be less likely to return the item, so the merchant loses again.
There are chargeback mitigation strategies that merchants can use to protect themselves from the financial burden and potential damage to their brand image, including chargeback remediation and management solutions. For over a decade, Chargebacks911 has offered impartial, customizable, and global solutions to streamline and automate manual processes and workflow automation tools to assist merchants and financial institutions in exchanging chargeback data seamlessly. To ensure the security of transactions for buyers and sellers, eCommerce retailers and banks must implement advanced technology, data intelligence, and flexible platforms.
Eaton offers this advice, "The interrelationship of the financial entities involved in the credit card processing lifecycle is a balancing act that requires fluid channels of communication. If something breaks down along the credit card transaction journey, merchants don't get paid. By adhering to financial regulations and industry security standards, proactive planning, and adopting proper risk detection and mitigation strategies, merchants can prevent revenue losses from avoidable chargebacks, fees, and penalties."
About Chargebacks911
Chargebacks911 is a global leader in chargeback management and remediation technology. As a provider or supplier to financial technology companies and financial institutions, Chargebacks911 safeguards more than 2.4 billion transactions per year on behalf of clients in 87 countries around the world. For details on Chargebacks911's comprehensive dispute management solutions, visit https://chargebacks911.com.
References:
1. 5 basic steps of the card transaction process. Chargebacks911. (2023, February 23). chargebacks911.com/credit-card-transaction-process/
2. What is a merchant account?. Business News Daily. (n.d.). businessnewsdaily.com/4791-merchant-account.html
3. Merchant account qualifications and Requirements - UNIBUL Merchant Services. (n.d.). blog.unibulmerchantservices.com/merchant-account-qualifications-and-requirements/
4. What is PCI compliance? 12 requirements; guide. NerdWallet. (n.d.). nerdwallet.com/article/small-business/pci-compliance
5. Group, G. L. (n.d.). Data Protection Laws and Regulations Report 2022-2023 USA. International Comparative Legal Guides International Business Reports. iclg.com/practice-areas/data-protection-laws-and-regulations/usa
6. Coos, P. by Andrada. (2022, May 11). Data Security for credit card and Transaction Processing Companies. Endpoint Protector Blog. endpointprotector.com/blog/data-security-for-credit-card-and-transaction-processing-companies/
7. Published by; Ani Petrosyan, 4, S. (2022, September 4). Cost of a data breach in financial sector worldwide 2022. Statista. statista.com/statistics/1324063/cost-of-data-breaches-in-financial-industry-worldwide/
8. PYMNTS.com. (2021, May 4). Securing Ecommerce Study - may 2021. Pymnts.com. pymnts.com/study/ecommerce-data-security-authentication-guest-checkout/#wpcf7-f1066933-o1
9. Pos System; Credit Card readers. Clover. (n.d.). clover.com/small-business-resources/credit-card-processing
10. DeNicola, L. (2022, March 21). What is the Fair Credit Billing Act?. Experian. experian.com/blogs/ask-experian/what-is-the-fair-credit-billing-act/
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SOURCE Chargebacks911
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