Who Is the Merchant in a Transaction and What Is Their Role?
Understand the merchant's role in transactions, their relationship with banks, and how fees and settlements work in card payments.
In the world of commerce, merchants are essential in facilitating transactions between consumers and businesses. As key players in the payment ecosystem, they accept payments and ensure smooth transaction processes.
Understanding merchant operations is important for both consumers and business owners. This includes recognizing their responsibilities and the complexities involved in processing payments.
Role of the Merchant in a Card Payment
Merchants are central to card payment transactions, acting as the interface between consumers and financial institutions. When a customer initiates a card payment, the merchant begins the authorization process by sending a request to the acquiring bank, which communicates with the cardholder’s issuing bank to verify funds. The merchant’s point-of-sale system ensures accurate data capture and transmission.
Once authorized, the merchant completes the transaction and handles issues like declined transactions or chargebacks. Chargebacks, which reverse transactions due to disputes or fraud, require merchants to maintain strong record-keeping and customer service practices.
Merchants must comply with Payment Card Industry Data Security Standards (PCI DSS) to protect cardholder data. Non-compliance can lead to fines and reputational damage, so merchants invest in secure payment systems and update security protocols regularly.
Acquiring Bank and Merchant Relationship
The relationship between a merchant and an acquiring bank is foundational for processing card payments. Through a merchant account provided by the acquiring bank, merchants can accept card payments and receive funds. The acquiring bank acts as a mediator, facilitating transaction data and funds flow.
Acquiring banks assess the merchant’s business model, transaction volume, and creditworthiness to manage risks like fraud or high chargeback rates. They also assist merchants in adhering to regulations such as the Payment Services Directive 2 (PSD2) in the EU or the Dodd-Frank Act in the US, offering tools to ensure compliance.
How Transactions Are Settled
The settlement process ensures merchants receive funds for card payments. After authorization, the acquiring bank batches transactions and sends them to card networks like Visa or MasterCard, which then transmit the information to issuing banks.
Issuing banks debit the cardholder’s account and transfer funds to the acquiring bank through the card network. The acquiring bank deposits the funds into the merchant’s account, minus applicable fees. Settlement timing varies, with some transactions taking several days to process, which can impact liquidity.
Fees and Deductions
The fees associated with card transactions are multifaceted. Interchange fees, set by card networks, vary based on transaction type, card brand, and industry category. These fees are typically a percentage of each transaction, often ranging from 1% to 3%.
Merchants also face assessment fees from card networks and additional charges from acquiring banks, such as monthly account maintenance fees, chargeback fees, and gateway fees. For example, payment gateway fees might range between $0.10 and $0.30 per transaction, which can add up for businesses with high transaction volumes.
Common Misconceptions
Misunderstandings about the merchant’s role and payment process are common. One misconception is that merchants receive the full transaction amount immediately after a sale. In reality, fees and settlement cycles reduce the final amount deposited into the merchant’s account, which can take one to three business days.
Another myth is that merchants are solely responsible for all payment disputes or chargebacks. While merchants must navigate disputes carefully, chargebacks often stem from issues like “friendly fraud,” where legitimate customers dispute charges they authorized. Chargeback rates also vary across industries, with high-risk sectors like travel experiencing higher rates.
Some consumers believe merchants control payment processing fees. While merchants can negotiate certain terms with their acquiring bank or payment processor, most fees—such as interchange rates—are set by card networks and are non-negotiable. This misunderstanding can strain customer relationships when businesses pass these costs onto consumers through surcharges or minimum purchase requirements. Educating both consumers and merchants about these intricacies fosters greater transparency and trust in the payment ecosystem.