payments industry, we commonly hear, “To
stay competitive in today’s economic
market, merchants need to offer a range
of consumer payment options, dynamic currency
processing and quick, secure real-time
payments.” Credit and debit card
processing is a complicated and highly
coordinated technical process which is
globally centralized and one of only two
truly global payment systems that actually
works so efficiently. The other, of course,
is Swift bank wire transfers.
instance, a Japanese consumer who completes
a credit card transaction, at a Grand
Canyon restaurant, via a wireless point-of-sale
device. Within seconds, the transaction
is authorized, the receipt is printed,
the customer signs it and the next day,
the merchant is paid.
ever stopped to wonder how the credit
card actually got charged? How the money
for the transaction was transferred to
the merchant and the transaction posted
to the credit card account? And what’s
involved in making all this work -- in
system is incredible when broken down
this way, and has both changed the way
the world pays and how physical cash moves
across global markets. The system has
virtually eliminated travelers’
checks, and hardly anyone carries around
more than a day’s worth of cash.
So, at a
basic level, here's how it works.
two elements to every credit card transaction:
a buyer and a seller -- or, simpler, a
debit and a credit.
card payments are just basic debits and
credits, but the complex routing of intermediaries
involved makes this the most reliable
and secure source for global payments.
are issued a credit card, with a specific
credit limit, by their card Issuing Bank,
which registers with Visa or MasterCard
to distribute credit cards to their bank
similarly, applies to accept credit card
transactions at their store or Web site
from a bank Acquirer, which registers
with Visa and MasterCard to allow their
merchants to accept credit card transactions
element between both Issuers and Acquirers
are Visa and MasterCard (the Card Associations).
They are the trusted "interchange
brokers" in the card transaction
process and balance the transaction funds
for settlement between Issuing and Acquiring
Banks. They also provide the accounting
entries to the Issuer and Acquirer in
order to balance the daily debits and
credits for both Cardholders and Merchants.
typically contract with a third-party
processor to manage their credit card
programs, which includes issuing the plastics
and managing the card-transaction exchanges/settlement
to the Card Associations. Acquirers, similarly,
work with a third-party processor to set
up merchant accounts and manage the reconciliation
of sales, refunds and chargeback transactions
performed at their stores (online or retail).
First Data is a well-known third-party
processor for both Issuers and Acquirers.
When a credit
card plastic is swiped through a point-of-sale
terminal or cash register, the information
contained on the magnetic stripe is read
by the terminal and reformatted along
with the transaction information to the
terminals are connected via a landline
to their Acquiring Bank (you can sometimes
hear the terminal dialing the phone number,
for instance). If it’s a wireless
point-of-sale terminal, then a Wireless
Application Protocol -- or WAP -- server,
or similar, is used to route the payment
to the Acquirer.
In the majority
of cases, the point-of-sale terminals
connect first to a switch at the Acquiring
bank, which then transmits the transaction
to the third-party processor via a leased
line circuit or Virtual Private Network.
reformats the transaction and electronically
submits it to either Visa or MasterCard
for authorization by the card Issuing
Bank or their representative third-party
processor. Visa and MasterCard are able
to identify who the Issuer is by the first
six digits of the card number, called
the Bank Identification Number, or BIN.
card product has a uniquely identified
BIN associated with the card product type.
When the Issuer is implementing a new
card product, they will request the Card
Associations to "point the BINs"
for authorization and settlement services
to their Issuing third-party processor.
The Card Associations know from the BIN
routing tables where to transmit or redirect
the transaction received from the Acquirer’s
third-party processor, to the Issuer’s
third-party processor, for authorization.
request, meanwhile, undergoes numerous
checks -- including validating credit
limit; number of transactions per day;
average transaction amount; merchant location;
Card Verification Code, or CVV; and card
status -- before a six-digit authorization
number is generated and the transaction
transaction is authorized, the original
transaction request is reformatted with
the authorization response -- which could
also be a decline -- and sent back through
interchange via the third-party processors,
on to the Acquiring Bank’s switch,
and then back to the originating Merchant’s
has a unique Transaction Identification
associated with it -- as well as a Merchant
Identification -- so the transaction is
directed back to the applicable Merchant
point-of-sale terminal awaiting the response.
The point-of-sale terminal does just that:
It waits for the authorization response.
the entire transaction-authorization process
happens -- end to end -- within a period
of 10 seconds, no matter where the Merchant
is located or where the Issuing Bank card
authorizations are processed.
So, in my
example above, the Merchant is located
at the Grand Canyon and the Issuing Bank
is in Tokyo. The transaction authorization
travels 11,088 miles on a return trip
across a multitude of secure electronic
systems to provide a payment response
within 10 seconds!
--> Merchant point-of-sale terminal
--> Acquiring Bank switch --> Acquirer
third-party processor --> Visa interchange
--> Issuer third-party processor (authorization)
--> Visa interchange --> Acquirer
third-party Processor --> Acquiring
Bank switch --> Merchant point-of-sale
terminal --> transaction approval or
decline = 10 seconds.
does the merchant get paid?
At the end
of the business day the merchant settles
their point-of-sale terminal or cash register
and totals their daily sales receivables.
This also means performing a function
within the point-of-sale terminal to total,
and then submit, the approved credit card
payments to their Acquiring Bank.
Bank receives all authorized transactions
from the Merchant terminals and submits
them to the third-party processor for
clearing. The processor receives the data
and formats clearing files for both Card
Associations and submits settlement data
to them on a daily basis.
Associations perform a financial reconciliation,
which calculates the total debits for
each Issuing Bank -- by BIN -- and the
total payments /credits for each Acquiring
Bank /Merchant. The totals for each Issuer
and Acquirer are then posted to the applicable
bank's clearing accounts, with Visa and
MasterCard, and reports identifying individual
transactions for that day are provided
to the third-party processor for their
receives a daily report identifying all
transactions posted to cardholder accounts,
and the Acquirer receives a report identifying
which Merchants need to be paid for sales
completed the day before.
bank posts those sales to the Merchant’s
bank account, minus commissions and fees.
Cardholder debits are typically posted
by the Issuer third-party processor, which
also prints the monthly cardholder statements
identifying the merchant transactions.
Credit card limits and balances are adjusted
once the transactions are posted by the
charged by the Card Associations to the
Issuers and Acquirers are known as interchange
fees, and range between 1 percent and
2.2 percent of the card transaction amount,
plus transaction fees.
rule is the Acquirer pays the Issuer the
interchange fees required to process the
sales transactions. The Card Associations
"net settle" to both the Issuer
and the Acquirer based on the fees associated
with the transaction type, the card product
type and the merchant transaction presentment
(card present, card not present, A.T.M.,
or Internet transaction replaces the point-of-sale
terminal with a certified Payment Gateway
Provider; but from here on, the process
works fundamentally the same.
merchants transmit credit card transactions
to their Payment Gateway Provider, which
formats the transaction for submission
either to the Acquirer third-party processor
or the Card Associations, directly. From
that point on, the process is identical
for authorization of transactions.
is processed by the Payment Gateway Provider
at the end of each day, in the same manner
as a point-of-sale terminal, in that files
of approved online Merchant transactions
are generated and sent to the Acquirer’s
third-party processor for onward settlement
by the Card Associations to the banks.
what front-end system or device is used
to acquire the card transaction, the back-end
authorization and settlement process remains
the same on a worldwide basis.