Ireland’s National Payments Plan, published in April 2013, emphasises the importance of the payments industry in enhancing our competiveness internationally. The focus is on reducing the reliance on paper based payments such as cash and cheques, and the promotion of secure and efficient electronic payment methods.
Merchant acquirers are one of the main participants in a card payment transaction, and provide the merchant (the retailer of the goods or service in question) with the means to accept a card payment. A typical card transaction in Ireland will include the following steps:
- The cardholder (customer) will seek to purchase goods or services from the merchant using a debit or credit card. The merchant captures the card number and amount of the transaction, and electronically submits the information to the merchant acquirer.
- The merchant acquirer will pass the information on to the relevant card scheme. The card scheme will in turn pass the information to the card issuing bank.
- Once the card issuing bank has verified that the card has not been reported lost or stolen and that there is sufficient credit on the card for the transaction, it authorises the transaction and the authorisation is communicated back to the card scheme and on to the merchant acquirer, and finally to the merchant.
- The merchant acquirer remits the transaction value to the merchant.
- Once the payment has been processed, the card issuing bank incurs a debt liability under the card scheme rules to the merchant acquirer.
If the customer does not receive the goods or services and requires a refund transaction, the merchant acquirer usually has an obligation to refund the card issuing bank and will usually be entitled to recover the sum from the merchant through their contractual arrangements. This reversal of the sales transaction is known as a “chargeback”, and commonly arises in cases where the wrong goods are supplied, the goods supplied are faulty or the goods are not supplied at all. The risk for the merchant acquirer arises where the merchant becomes insolvent between the date of the transaction and the date of the chargeback and is unable to reimburse the merchant acquirer.
If the acquirer cannot recover the amount of the chargeback from the merchant within the relevant period, it will bear the loss of the chargeback amount. The exposure of the acquirer arises during a “chargeback period” only. After the chargeback period, the risk passes to the card issuer. It is therefore important from an acquirer perspective to be aware of when the chargeback period commences (usually either the date the transaction is processed or the date the goods or services should have been received), in order to assess the period of liability for the acquirer.
Another important element for merchant acquirers to bear in mind is the financial position of merchants. Detailed financial due diligence procedures should be undertaken when onboarding merchants. It is also recommended that acquirers conduct on-going financial due diligence procedures in respect of existing merchant customers. These measures could include conducting regular updated credit assessments of merchants, or periodic audits of the merchant customer base where assessments are made of a cross section of merchants to determine whether any have been subject to an insolvency event.
In the case of a high risk merchant, or a merchant who may take payment up front but not necessarily provide the service or product immediately (for example, a concert promoter who sells tickets for future events), the acquirer may choose to either request that the merchant provide an agreed sum on deposit as collateral or, depending on the terms and conditions agreed to, withhold the funds processed for these transactions for a longer period of time to protect itself in the event of the merchant being unable to deliver the goods/services in question.
It seems likely that the on-going reform of the Irish payments landscape will ultimately result in electronic forms of payment becoming the preferred payment choice for most Irish consumers and businesses. As the National Payment Plan unfolds, merchant acquirers need to remain vigilant in relation to the financial position of their customers, and the duration of their period of liability so as to avoid exposure for merchant insolvency.