The underwriting of credit card processing accounts is done by merchant banks that are members of the Credit Card Associations of Visa and MasterCard. The underwriting process consists of evaluating the risks, associated with allowing a merchant to accept credit card payments through a detailed analysis of the applicant business' credit history and the business' prior processing history (if applicable). Just as with a personal or a business loan, banks want to make certain that applicant businesses are responsible entities, because, in effect, a credit card processing service is a form of credit. When a merchant receives a card payment, it is authorized, cleared and settled by the merchant processing bank. At the end of the business day the processing bank receives the transaction information and funds the amount, after subtracting its own processing costs, into the merchant's bank account. Then it waits for the card issuing bank to remit the payment amount. At this time, if the card issuer or their cardholder disputes the transaction, initiating a chargeback, or if it turns out that the transaction was fraudulent, the processing bank may never receive its money. In addition, if a merchant generates a consistently high level of chargebacks (over 1%), the Credit Card Association will assess fines on the credit card processing company that has underwritten the account.
Merchants typically receive their credit card processing service from Independent Sales Organizations (ISO). These are licensed by the Credit Card Associations and have relationships with merchant processing banks. Once a processing agreement is signed, the processing bank, also known as a merchant bank or acquiring bank, commits to acquiring the merchant's card transactions and funding the transaction amount minus the processing costs. Processing banks are usually card issuers as well.
