Internet-acquiring and Omni-channel Payment Platforms

If you are an online business looking for a processing center to partner with, this article is for you. In it we will explain the benefits of a payment platform, specializing on internet-acquiring, as a potential partner for online businesses. The purpose of this article is to clarify the main criteria to be used as guidance when selecting a processing partner; it is designed for online businesses in search of a processor, or online businesses trying to get merchant accounts.

Presently, we see more and more omni-channel payment platforms appearing every day. The term “omni-channel” implies that these platforms support almost all types of payments and transactions, present on the market. However, there are many companies, specializing in some particular payment types. For example some companies specialize on processing of card-not-present transactions, while others specialize on card-present ones.

Internet acquiring is a kind of acquiring activity, focused on merchant account issuance to online businesses.

There are many payment processors (processing centers) on the market. Many of them represent omni-channel payment platforms. However, they are not always suitable candidates to partner with for online merchants.

If you are an online merchant in search of a processing center to partner with (or an online business still trying to get a merchant account), why not make your partner search more targeted? You do not necessarily need an omni-channel payment platform (as it may be a costly option, involving many unnecessary functions you will still have to pay for); maybe the most suitable potential partner is the one, specializing in internet-acquiring services.

This processing center should

  • support the necessary merchant category codes (MCC), currencies, payment types;
  • have the tools and functions you need, as well as integrations with shopping carts (or other logins for online systems, facilitating online commerce);
  • charge reasonable commissions for processing of particular types of transactions (both, one-time commissions and subscription-based regular payments);
  • support 3D secure and online anti-fraud tools;
  • have a flexible and effective customer service etc.

Also, collaboration with companies, specializing in internet-acquiring may be beneficial, because it requires lesser skills and, consequently, lesser operations capital, than partnerships with companies, which, beside internet-acquiring, work with payment terminals. These “universal” companies have to deal with respective logistics-related and other issues (also requiring additional efforts and resources) and are less focused.

Conclusion

If you are an online company looking for a merchant account, or an online merchant looking for a processing center, a processing platform, specializing solely on internet-acquiring may be the best option for you in terms of both budget and functionality.

Payment Processing Solutions

In this article we are going to look at several ways to implement a payment processing solution available to merchants and payment service providers who process credit card and ACH transactions.

On the importance of payment processing solutions

At some point many companies that process credit cards face the question of how to implement their connectivity with a credit card processor. There are various options these companies can choose from. Each of the payment processing solutions (direct acquirer integration, connector or payment gateway) has its strengths and weaknesses, so merchants and payment service providers must consider their particular needs before choosing the most suitable integration option. The following sections cover each of the possible solutions.

Direct acquirer integration

Direct acquirer (or processor) integration envisions implementation of the processor’s specification. The integration software code is written as part of the merchant’s application going directly into the payment processor’s system.

The advantages of this payment processing solution are as follows:

  • the merchant is communicating directly with the processor, and no intermediaries are involved; consequently the number of potential intermediary points of failure is lower
  • no additional costs are incurred by the merchant since no middleware technology is used
  • direct acquirer integration tends to perform better even on high transaction volumes

The disadvantages of direct acquirer integration are as follows:

  • the solution is one of the most difficult ones to implement, as integration specifications for platforms used by many payment processors are complex (often due to legacy technology that they rely on) and, consequently, much effort is required to implement the format
  • certification queues tend to be long and the time to open a project and get a specialist assigned can be quite extensive
  • because of the complexity of the specification, certification process requires multiple iterations (certification test executions), and each of them tends to take considerable amount of time

While direct acquirer (processor) integration provides merchants with the greatest control and flexibility and lowest long-term per-transaction cost, it is one of the most time-consuming approaches, carrying significant upfront cost in comparison to other options because of complexity of specifications and legacy technologies used by payment processors.

Connectors

A connector represents a special software component that implements a payment processing specification and can be incorporated into a merchant’s application to simplify direct acquirer integrations.

While a merchant, using a connector component still has to go through certification with the payment processor, the implementation phase is significantly simplified.

Connectors can be of two types:

  • Software component – the component is integrated within the main application and is used to format messages.
  • Middleware – a piece of software installed separately from the merchant’s application. It receives incoming messages and converts them to the format of the underlying payment processor.

The advantages of connectors as a payment processing solution type are listed below:

  • connectors tend to reduce the development effort during the integration phase and can be used by wider range of software developers, not only by the most highly experienced ones
  • a connector eliminates the need for the integration code and subsequent maintenance
  • when new processing features become available, connector vendor takes care of support of these features

The disadvantages of connectors are as follows:

  • depending on the quality of the connector, performance problems might be experienced on high transaction volumes or in multi-threaded environment
  • it is difficult to introduce any types of tweaks or adjustments into connectors with no source code available, if necessary. Consequently, if something is wrong, no one but the vendor can fix the problem
  • upfront cost associated with licensing of the connector

For merchants that prefer upfront investment (as opposed to per-transaction gateway cost) and want to go with direct integration, eliminating intermediaries, connectors provide a good option to use, especially if their transaction volumes are not extremely high.

Payment gateway solution

A payment gateway is a solution similar to a middleware connector, incorporating various additional functions and supporting several different payment processors simultaneously. A payment gateway usually has an infrastructure to maintain merchant preferences and configuration settings associated with it.

The advantages of such payment processing solution as a payment gateway are as follows:

  • integration and certification processes are considerably simplified
  • additional features, such as host capture, are available
  • simplified PCI-compliance certification (payment gateways support pay-pages and other related solutions, thus, reducing merchant’s PCI scope); (more information on PCI compiance can be found here and here )
  • support of recurring payments

The disadvantages of payment gateways are listed below:

  • significant upfront fee / license cost or increased ongoing per-transaction cost
  • when hosted solution is used, a merchant has lower degree of control over the network environment of a payment gateway
  • merchant has low degree of control of the underlying logic of transaction processing

Despite the limitations of the payment gateway solution, it is the preferred choice of most merchants and payment service providers today.

Conclusion

Every merchant, processing credit cards, must make an informed choice from among payment processing solutions (integration options), depending on the merchant’s business size, overall transaction volume and specific business needs.

The next post will represent a detailed coverage of payment gateway solution types and payment gateway pricing structures.

Payment Gateways II: Credit Card Convenience Fees

The purpose of this article is to familiarize merchants and resellers with the concept of transaction surcharges as an advanced feature to be considered during payment gateway/processor selection.

If this is the first time you are reading our “Payment Gateways II” series, please, start with the Introduction to improve your understanding of this post.

Some businesses require surcharging a fee on top of the original transaction amount. The two most common surcharge examples are credit card convenience fees and taxes.

Credit card convenience fees

Every time a merchant processes a transaction, there is a processing cost associated with it. Traditionally it used to be covered by the merchant. However, there is a practice of applying a credit card convenience fee, functioning as a surcharge on the original transaction, to pass the cost of processing to the cardholder. Historically associations, such as Visa, MasterCard tried to discourage the practice, but under the pressures of businesses they’ve accepted it. As a consequence, many merchants are now able to afford credit card processing, because they are charging convenience fee to cardholders.

Credit card convenience fee implementation

Credit card convenience fee can be processed as part of the original transaction or it can be processed as a separate transaction, resulting in two transactions on the card. The first option is often considered a better one; it is preferred by Visa, and, from cardholder’s viewpoint, it involves just a single transaction. The second option is unpopular with card associations, especially with Visa.

If a merchant business is limited in the capability of doing two transactions, it needs to go with a processor capable of accommodating the surcharge in a single transaction. If a business chooses to use two transactions through two different MIDs then it will need to somehow handle the situation when the second transaction doesn’t go through because of insufficient funds or network communication error.

A mechanism very similar to the one used for credit card convenience fees is also used for surcharging of taxes.

While support for surcharges is not a very critical factor, and the entire decision, whether to go with a processor or not, is not going to be based on it, it should be considered. So merchants should discuss the support for surcharges of credit card convenience fees with their processors.

Let us look at a real-life example of how credit card convenience fees are used.

Example

A bill payment service company has an online payment portal that utility companies can use to collect past due balances from their customers. The bill payment company wants to surcharge a 5 % convenience fee on every transaction processed to cover the costs of processing and its services.
The simplest way for the company is to send a single transaction and then get its 5 % as a rebate back from the processor. The ability to charge a credit card convenience fee as part of the original transaction and receive the money back from the processor as a form of rebate at the end of the month (or simply get its 5 % automatically deposited to its account the day after the transaction is processed) reduces the complexity of integration process for the bill payment company. In either case payment processing logic within the bill payment application becomes considerably easier (as there is no need for logic targeted at processing of credit card convenience fee as a separate transaction).

Conclusion

Businesses that need to charge credit card convenience fees should go with a processor that has native support for that. When evaluating processors’ convenience fee support capabilities, businesses should pay attention to the available mechanism (one transaction vs two transactions); the decision regarding processor selection should be made based on the specific business requirements.

Payment Concepts: ACH Returns

The purpose of this article is to improve the understanding of ACH processing and the concept of ACH returns among merchants, resellers and credit card transaction processors. With better understanding of ACH processing lifecycle in general and nature of ACH returns in particular, considerable money losses from ACH fraud can be avoided.

Our previous post in this topic focused on credit card chargebacks, which are similar in nature to ACH returns. It might be beneficial to review that article before reading current one.

For those unfamiliar with the term, ACH stands for Automated Clearing House – a nationwide fund transferring network. Inter-bank transfers happen through an ACH operator – a Federal Reserve Bank or a private organization used as the central clearing facility. A more detailed explanation can be found here.

Why ACH returns are important

Misconceptions concerning сredit card transactions and ACH transactions are somewhat similar. Without a clear picture of complete credit card transaction processing cycle, people often forget about the possibility of chargebacks. Similarly, without thorough understanding of the full ACH transaction processing cycle, people often concentrate on the initial phase which includes processing and funding. Just like in the case of credit card transactions, ACH transaction approval is not the concluding phase of the processing cycle. To understand the full lifespan of ACH transactions, one needs to devote special attention to ACH returns. (To realize, the importance of ACH returns, it is sufficient to look at ACH return statistics).

Without a clear picture of the full ACH transaction processing cycle, a business can become a victim of ACH fraud. Consequently, the possibility of fraud, induced by the nature of ACH returns, should never be forgotten.

ACH return concept

An ACH return is a reject generated by the receiving depository financial institution (RDFI) in response to an ACH transaction, requiring money transfer, because it cannot be processed. The most common reasons (return codes) behind this include:

  • Insuffient Funds
  • Account Closed
  • Invalid Account Number

A complete list of return codes can be found here .

Many people think that once their ACH transactions are funded, this is the final stage of the process. Yet, ACH does not work like credit cards. For example, a person dealing with ACH transactions may think that if after two or three days the ACH return doesn’t arrive, the money already belongs to him\her. In practice the process may take up to two months. As mentioned above, the ACH transaction lifecycle involves the ACH operator, temporarily granting all the funds requested. Later the ACH operator may demand the funds back, if it turns out that the bank holding the account for which the request was placed couldn’t provide the money (possible reasons are mentioned above).

Let us take a more detailed look at how ACH returns occur.

ACH return mechanism

When a request is submitted to the ACH operator, the funds are granted. After that the ACH operator dispatches requests to the respective banks that are holding the accounts. If the request cannot be fulfilled by the bank, holding the account, the ACH operator requires the funds to be returned – and that money is taken back by means of generating an ACH return.

In addition to ACH return, there is a concept of a notice of change (NOC).
A change in bank account information of a customer may result from bank mergers, changes in account numbering schemes, etc. In cases like these, an ACH transaction is properly processed, using outdated information, but updated information to be used in any subsequent request, is returned to the submitter (merchant). This updated information sent to the submitter is called a notice of change. A notice of change requires the submitter to update the bank account information before submitting the next request. If, for instance, outdated routing number is used in a subsequent request, the transaction may not be processed, and can result in an ACH return.

Not all banks have fully automated (computerized) management systems, and in some cases they have to resolve certain issues by mail, telephone, or using other communication means. Consequently, the process of verification of funds’ availability on accounts can take up to two months. As a result, an opportunity for ACH fraud arises.

ACH fraud

As mentioned above, not all banks respond to ACH operator’s queries quick enough. A bank’s response may, take up to 60 days. Consequently, if an attacker (consumer or merchant) finds a bank with a long response time, he\she can use it to commit a fraud.

Consumer fraud

Consumer fraud can be committed by a merchant’s client. Particularly, such a client can order some product\ service from a merchant, pay for it through ACH, and get this product\service within a week. If an ACH operator needs two or three weeks to verify whether the bank account, specified by the client, actually exists and if there are some funds on it, the fraudster has the ability to use invalid account numbers for the purchase, and escape during the week between the purchase and the ACH return.

Merchant fraud

A merchant can commit a fraud against the Payment Service Provider (PSP).

Particularly, to commit a fraud, a merchant can submit ACH transactions specifying non-existent accounts whose routing numbers correspond to the “long-responding” banks. In this case the attacker’s transactions can get funded pretty quickly (as ACH operator initially grants the funds), but they will be returned after banks verify that the accounts do not actually exist (up to 60 days). But during this time the merchant has an opportunity to escape with the money, leaving the financial liability to the PSP.

There is a set of instruments merchants, resellers and processors can use to prevent ACH fraud.

ACH fraud prevention methods

The most common tools used by merchants against consumer fraud include:

  • IP-address-based filtering of accounts (if an account comes from a high-risk geographical location, the transaction is not processed);
  • identity verification against various blacklists (blacklists feature e-mails, addresses etc of potential fraudsters; if an account is on some blacklist, the transaction is declined, and there is no need for further time-consuming verification process);
  • check verification and check guarantee services. (An ACH transaction is, in fact, an electronic check. Check verification services include verification of the check-writer’s name, account number, and routing number data against different blacklists, as well as account status checks; check guarantee service requires all checks to be approved (through a terminal at the POS, voice authorization or I-check approval software installed on a PC) before being accepted).

The most efficient tools used by resellers and PSPs against merchant fraud are:

  • ACH reserves (held by processors\payment gateways and large-scale resellers to compensate potential ACH returns issued to their sub-merchants);
  • so-called “processing caps” (limiting the number and amount of transactions processed by a merchant during a fixed time interval, e.g. per week\day\month);
  • blacklists (for instance, featuring invalid bank accounts, for which ACH returns were previously generated).

Conclusion

Thorough understanding of ACH transaction processing cycle and competent implementation of respective fraud protection tools allows merchants, resellers and PSPs to prevent money losses resulting from fraudulent ACH returns.

Payment Gateways: Introduction

Modern market environment constantly calls for new solutions in the area of credit card processing.

For many merchants in today’s market it is extremely important to make the right decisions concerning merchant accounts, merchant services and merchant relationships. Unfortunately, many merchants are stuck with the misconception that when it comes to merchant services the only thing that matters, the only determining factor while making a decision, is the price. Or, to put it simply “whoever offers a better deal in terms of costs is going to be the preferred choice”. While the cost actually is the most important aspect, it is far from being the only one.

Feeling the need for informing the key players of merchant services industry about various aspects of credit card processing, we’ve decided to publish a mini-series of posts intended to help individuals and organizations facing the task of credit card processor\payment gateway selection. Each of these posts will be dedicated to some specific aspect to be considered while selecting a payment gateway.

The series is addressed to the two groups of entities we are going to refer to as merchants and resellers. Merchant’s and reseller’s viewpoints will provide the two key payment gateway selection perspectives. In order to ensure clear understanding of our terminology, it is appropriate to start by defining these two terms.

Payment gateway selection perspectives: merchants and resellers

A merchant is a business that needs to process transactions for itself. Let us consider a health club as an example of a merchant. The reason for choosing a health club as the most illustrative example among potential ones is because a health club has multiple uses for credit cards.

A health club needs to process transactions (a retail “card-present” transaction) at the point of sale (for instance, a member buys a protein shake). On the other hand, any decent health club has a web-site where customers can also make payments and buy things online – so here’s where e-commerce comes into play. And, finally, sometimes club representatives might contact their clients by phone to collect past dues – that is another example of card-not present transaction, beside online payments. As we can see, a health club usually conducts transactions involving several so-called industry types, both card-present and card-not-present (retail, e-commerce, direct marketing, mobile and others).

Alongside merchants, there is an emerging group of entities (people or organizations) functioning as intermediaries between merchants and processors. Here we are going to call this group resellers. Resellers help merchants to get their merchant accounts or contribute to processing of the transactions in some other way. Examples of resellers include software companies, ISOs and, potentially, franchise owners.

Since a health club is chosen as a merchant example, a fitness software company should provide a suitable example of a reseller to refer to. Most club management software packages today have credit card processing as their component. People using the club management software automatically become prospects for the sale of merchant services. This provides the software company with an opportunity to partake in residual revenue. It becomes the link to connect the club with the processor\payment gateway (in technical terms) or the ISO\underwriter (in business terms).

Now that the play-field is defined, it’s time to move to analysis of specific features to be considered during payment gateway selection. The next installment is going to cover the processing costs.