All too often across the Fintech industry you’ll see complicated and loaded terms being thrown about without a care. Often this can be confusing and leave newbies at a huge disadvantage, when it’s already difficult enough in the early days of a career. This is especially the case for entrepreneurs and start ups who may be blazing their trail from a humble starting point or at a young age.
Most large financial companies (especially in B2B) assume the reader is already familiar with often complex terms and use them very freely, but if you are new to this terminology then this quick guide should be helpful to you.
Understanding the Payment Process for Merchants
In order to obtain a comprehensive overview of how the payment process works for merchants and what parties are involved in the journey, from start to finish – first we must gain a basic grasp of each of the factors involved. This way, we will learn their motivations and how they interact with each other.Issuing Banks
Firstly, before any money is even spent by a consumer – Credit cards are issued by a bank, known as an issuing bank. The issuer deals with the cardholder’s account itself and interacts with the consumer (their customer). Looking to the external parties from this point – these issuing banks work with credit card companies (credit card networks) to provide credit to their customers.
On the contrary an acquiring bank, commonly referred to as an acquirer, is the merchant’s bank. It accepts payments for the business owner through a payment processor and credit network, into the merchant account. So keep in mind that the acquiring bank deals with the merchants account and the issuer deals with the consumers credit account.
Issuers and Acquirers – Combined Services
Slightly confusingly, a single bank can act as the issuing and acquiring bank for a merchant. This means they are doing everything from start to finish. This can be a convenient situation for the end customer, however it’s not so simple behind closed doors. Often the bank that offers this combined service will be part of a much larger network, of trusted resources and acquiring services. If you are interested in learning more about this we recommend checking out this guide that Monneo published:
This type of bank is quite rare still in 2022, however it’s a growing trend that is observable in the Fintech sector. Online banking solutions are starting to offer better services than traditional banks due to increased demand as well as increased expectations from business owners. If this is still a bit foggy, we’d advise some further reading – Monneo published a guide which further clarifies the differences between issuer and acquirer banks.
A Whistle Stop Tour of Chargebacks:
A problem that many businesses (aka merchants) come across is the dreaded chargeback. These are disputes that happen when a consumer says that a charge was made without their consent or that an item or service was not provided as agreed. A chargeback involves the participation of both the issuing and the acquiring bank. Chargebacks are a problem for banks, too. Often they will set a chargeback threshold to mitigate damages and these are often baked into contracts. If these terms are breached it can lead to consequences such as fines, increased reserve requirements, or account termination. So it’s in everyones best interest for chargebacks to be dealt with efficiently and to avoid them where possible.
Some types of businesses attract frequent chargebacks, these are known as “High-risk” businesses, or companies that operate within “high-risk” sectors.
This can include (but is not limited to):
- Ticket booking services (concerts, events etc.)
- Travel agencies
- Gambling companies / websites
- Online pharmaceutical
- Adult sites
- CBD businesses
- & more.
Notice any patterns here? From a regular acquiring banks perspective, many of these types of businesses have increased risks of fraud, refunds, or other issues occurring during day-to-day operations. Due to which, chargebacks may be allocated or accounts can be frozen with short notice until certain details are resolved between parties. Making sure that contracts are followed correctly.
Simply put, a merchant account is literally just a bank account for a merchant. Provided by the acquirer (mentioned just above). Before a merchant can open an account with an acquiring bank, they must provide the bank with certain identity, business ownership, and business record information, which the bank then evaluates to estimate the amount of risk associated with handling that account.
High-risk Merchant Accounts
Following from the above, if you are an owner of a hotel or travel agent – why should you be subject to banking problems and slowness, if you are doing your best to comply with the agreed policies. This type of red tape can be frustrating and has been known to cause businesses to actually lose customers (due to slowness / lack of fast resolutions between parties).
The solution to which is: High-risk merchant accounts. They are exactly what they say on the tin – a bank account for merchants that are specifically tailored to high-risk industries. Often these are offered by online banking services who tend to be a little ahead of the game when it comes to this type of thing.
In summary, note that the issuing bank is for the consumer – the acquiring bank is for the merchant and that chargebacks are a negative for everyone. However, they are necessary to ensure transactions are consensual.
High risk accounts can aid businesses that work in high-risk sectors. Essentially, doing a little bit more preparation and getting set up with the right type of account ahead of trading pays off in the long run.
We will leave it there for now as to not bombard you with too much terminology at once. Hopefully this was helpful and gives you a footing when reading some of the more wordy articles out there. Despite the terminology being often complex – the workings of the fintech sector is a really interesting field. We advise getting stuck in and challenging yourself with the details.
You may be interested in: 6 Points to Keep in Mind About Offshore Merchant Accounts