Ebook Merchant Processing
Merchant processing is the settlement of electronic payment transactions for merchants. Merchant processing activities involve gathering sales information from the merchant, obtaining authorization for the transaction, collecting funds from the card-issuing bank, and reimbursing the merchant. The processing of sales transactions for merchants by banks does not directly affect the bank’s balance sheet except through settlement accounts and reserve balances. However, merchant processing can create significant off-balance-sheet contingent liabilities that may result in losses to the bank.
Most merchant processing transactions originate from retail credit card purchases, but debit card purchases, smart card purchases, and electronic benefits transfer (EBT) transactions are increasing sources of processing volume. In recent years, bankcard associations have aggressively promoted the move to electronic transactions through their interchange rate structure. Because of this and advances in technology, the vast majority of credit card sales transactions are now electronic.
Merchant processing is a business of high volumes and low profit margins. Generally, a high level of sales and transaction volume is needed to create a profitable operation as a result of the low income generated per transaction. Processing high transaction volume carries risk; only efficiently run departments can successfully maintain the necessary cost controls and effectively manage the accompanying transaction and credit risks.
As a high-volume business, merchant processing is dominated by a relatively few large and midsize banks, which often use the services of independent sales organizations or membership service providers (ISOs/MSPs), join partnerships/alliances, or enlist agent banks. These dominant banks are intensely competitive, and they price aggressively. To create economies of scale, they have steadily increased the volume of their merchant processing during the past 10 years.
Some bankers do not understand merchant processing and its risks. Attracted to the business by the potential for increased fee income, they may underestimate the risks and not employ personnel with sufficient knowledge and expertise. They also may not devote sufficient resources to oversight or perform proper due diligence reviews of third-party organizations. As well, many banks simply do not have the managerial experience, resources, or infrastructure to safely engage in merchant processing outside their local market or to manage high sales volume, high-risk merchants, or high chargeback levels.
This handbook will focus on card payment-related processing, which is a separate and distinct line of business from credit card issuing.
Contents
Introduction
Types of Merchant Processors
Acquiring Banks
Agent Banks with Liability
Agent Banks without Liability (Referral Banks)
Third-Party Organizations
Operations
Authorizing Transactions
Settlement
Chargeback Processing
Fraud Detection
Pricing
Pricing Components
Primary Risks
Strategic Risk
Credit Risk
Transaction Risk
Risk Management and Controls
Board and Management Supervision
Agent Banks
Referral Banks
Capital
Security Pledges
Merchant Underwriting and Review
Profit Analysis and Monitoring Pricing
Fraud Monitoring
Chargeback Monitoring
Settlement Controls
Managing Third-party Organizations
Examination Procedures
Procedures: Quantity of Risk
Procedures: Quality of Risk Management
Policies
Processes
Personnel
Controls
Agent Bank: Examination Procedures
Agent Bank Procedures: Quantity of Risk
Agent Bank Procedures: Quality of Risk Management
Policies
Processes
Personnel
Controls
Conclusions
Internal Control Questionnaire
Policies and Procedures
Management and Board Supervision
Audit Coverage
Approving Merchants
Settlement Process
Chargeback Processing
Fraud Detection
Agent Banks
Third-Party Organizations
Pricing
Department Profitability
Credit Card Equipment
Verification Procedures
Appendix A: Portfolio Profile Worksheet
Appendix B: Request Letter
Appendix C: Profit and Loss Statement
Appendix D: Merchant File Review Worksheet
Glossary
References
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PDF Ebook Merchant Processing
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