Ramon P. DeGennaro
Economic Review, Vol. 91, No. 1, 2006
Download the full text of this article 
Each year, hundreds of millions of credit and debit cardholders make billions of transactions worth trillions of dollars. Yet few consumers are aware that such transactions travel through, and are made possible by a highly evolved group of intermediaries that sign up merchants to accept cards, handle card transactions, manage the dispute-resolution process, and, along with regulatory agencies, set rules that govern card transactions.
This article demystifies the "Black Box" of the transactions process for payment cards. After describing a simple transaction with a private-label card, the author then considers the complications introduced by general-purpose cards, such as Visa and MasterCard, emphasizing the key roles of merchant acquirers and card processors.
Merchant acquirers, who sign up merchants to accept cards and who provide or arrange for processing, bear most of the risk of loss if merchants fail to make good on credit transactions disputed by customers. To guard against such losses, acquirers carefully evaluate the credit quality of merchants seeking or using the acquirers' services.
The article delineates some of the risk factors associated with specific industries, merchant types, and transactions that influence the price merchants pay for acquirers' services. Finally, the article discusses some ways that merchant acquirers manage risk, especially the risk of fraud.
April 2006