Credit Card Merchant Account

A merchant account is a type of bank account that allows businesses to accept payments by debit or credit cards. A merchant account also serves as an agreement between a retailer, a merchant bank and payment processor for the settlement of credit card and/or debit card transactions.
Today a majority of credit card transactions are sent electronically to merchant processing banks for authorization, capture and deposit. Various methods exist for presenting a credit card sale to "the system." In all circumstances either the entire magnetic strip is read by a swipe through a credit card terminal/reader, a computer chip is read, or the credit card information is manually entered into a credit card terminal, a computer or website. The earliest methods, submitting credit card slips to a merchant processing bank by US mail, or by accessing an Automated Response Unit (ARU) by telephone, are still in use today but have long been overshadowed by electronic devices. These early methods used two-part forms and a manual device for mechanically imprinting the embossed card number information onto the forms. Whenever practical it is best to swipe a credit card because the rates will be much lower and the incidence of stolen credit card number fraud is greatly reduced.

Historically credit card processing services were provided by banks that were members of the Visa or Mastercard networks. Typically banks both issued credit cards and helped merchants process them, but over time the industry consolidated. Now, very few banks issue credit cards and the industry is dominated by a few large issuers - Citibank, Washington Mutual, Capital One, MBNA / Bank of America, and Chase. Even fewer banks process credit cards. 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 including TSYS ,First Data and MSI.

Now, while some merchants buy their credit card processing services directly from a bank, more typically they get their credit card processing services from an ISO, which is responsible for selling the service to the merchant, providing technical support, processing the transaction (authorizing it and submitting it to the Visa or Mastercard network), bears the risk of chargeback(s), and sets the price of the services. If the ISO is a small ISO it might outsource some of those services (for example providing technical support) to a larger ISO. Except for the few very largest ISOs, the ISO outsources the actual processing to a larger company that focuses solely on processing.

While each of the firms discussed above provides merchant accounts and could legitimately be called the merchant account provider, in practice the phrase usually refers to whichever organization has responsibility for directly maintaining the relationship with the merchant.