Credit card payments are the name of the game and there are four key players: the cardholder, the issuer, the merchant and the acquirers. The first and third are simple enough to understand without much of an explanation. A cardholder is the individual who owns the credit card making the payment. The merchant is the business receiving the payment in return for a good or service. However, issuers and acquirers require a more detailed look to see where chargebacks and a chargeback mitigation solution fits in the bigger picture.
Issuers are financial institutions that offer credit cards to individuals to use. These financial institutions are acting as lenders, i.e. providing credit to cardholders and accepting the risk that they may be stuck with the bill if the cardholder runs away or declares bankruptcy. This is why issuers review credit card applicant’s credit history and income and set credit limits.
The largest U.S. issuers in 2020 were Chase, American Express, Citi, Capital One, Bank of America, Discover, U.S. Bank and Wells Fargo, according to industry trade publication the Nilson Report.
Issuers make money from interest and late fees charged to cardholders. Some cards have annual fees. Almost all cards have fees for late payment and for transferring debt from one card to another, known as “transferring a balance.” Whenever you carry a monthly balance, i.e. have debt on a card, you are also charged interest. Usually, the interest rate is a relatively high one, far above the prime rate.
Besides cardholder fees and interest charges, issuers also make money from interchange fees on cardholder transactions. These fees are the percentage, typically between 1 and 3 percent, that the merchant pays to process card transactions. The interchange fees are normally split between the issuer and the card network, with the lion’s share going to the issuer.
At the end of the day, the issuer’s capability to make money either directly from cardholders or indirectly by requiring merchants to pay the interchange fee depends on its relationship with its cardholders. This is why the issuer represents a cardholder’s interest in chargeback cases and why the issuer has a strong inclination to side with the cardholder in the event of a payment dispute.
Acquirers on the other hand are financial institutions that serve merchants by providing them with accounts for receiving credit card payments. They receive their own pass through fee or add-on rate from merchants when they facilitate payments.
The top merchant acquirers in the U.S. as of 2020 were Chase, Fiserv, FIS, Global Payments, Wells Fargo and Bank of America, according to Nilson Report rankings. It’s both amusing and important to point out that the biggest issuer and biggest acquirer in 2020 was the same bank, Chase. There is nothing preventing the same bank from representing both sides of a transaction, albeit or perhaps because each side is represented by a separate division within the bank.
Acquirers take a few risks when accepting merchants. Foremost among them is the risk that some of its merchants will close or disappear before paying for chargebacks, leaving the acquirer on the hook for the bill. Second is that the acquirer’s portfolio of merchants will generate too many chargebacks, drawing ire of the card network, which will place the acquirer in a monitoring program with fines for excessive chargebacks. Last is the risk that its portfolio of merchants will become too frequent a victim of fraud, also landing it in the card network’s monitoring program with appropriate fines.
Because of the risks they take and as a way to attract merchant clients, acquirers work with their merchants to successfully address their chargebacks. At Justt we get requests from acquirers and payment service providers (PSPs) to offer a chargeback mitigation solution to their clients. Our risk-free, hands-free solution is ideal for companies that want to refocus on their core business and avoid the complexities of dealing with the chargeback process. From eCommerce and fintech to travel and gaming Justt’s success rates are the highest in the industry.
