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Definitions used in Credit Card Processing

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Definitions

There is often confusion between the purpose of a bank, a processor, and an aggregator, and understanding the difference helps make sense of the authorization options available to you.

  • Bank: A bank is where the money ends up at the end of the day. If somebody gives you money in any form (cash, check, credit card), you write up deposit slips and take it to the building at the corner on the main street. Banks are brick-and-mortar companies with charters to write loans, put your money in a safe, etc.
  • Merchant Processor: A processor is not a bank. Direct Processors are only in the business of authorizing credit cards on behalf of a bank and hold on to the money while it is electronically in transit to your bank. When you do your daily credit card batch settlement, the money in transit is transferred directly to your bank. In North America, there are about 15 major processors such as Paymentech, Nova, 1st Data, Visanet, FMDS, Vital, TSYS, etc. Some banks prefer working with some processors - but generally most processors can get your money to any bank.
  • Merchant Provider/Aggregator: There are numerous (meaning hundreds) of aggregators that will process your card for you. All those aggregators use one of the 15 merhant processing companies. Think of the merchant provider/aggregator as being like an insurance broker... they shop for the best deal with a processor. The processor is the actual company that does the credit card processing for the aggregator.
  • Merchant Account: You set up an account with one of the processors or aggregators, who then assigns to you a merchant number. The merchant number accompanies transactions submitted to the processor and identifies (1) who should get the money (i.e. you), and (2) which bank account the money gets deposited to.
The reason that processors and banks are separate is historical. Banks started as local or regional entities in the USA. Most were not big enough to handle the infrastructure of authorizing credit cards. When cards became very popular in the 70's, they farmed out the business of authorizing cards to a processor as an economical means of providing cards to their customers without the expense of hosting large computer centres.