Credit cards are at the forefront of frictionless business
payments. As a result of the pandemic, the move to a cashless society is
accelerating and card payments are fundamental for your payment acceptance
strategy.
The card payment lifecycle may seem straightforward - you
accept the card and the funds get transferred to the account. It only takes a
few seconds, however, the process behind this is extremely complex, requiring
interactions between multiple participants.
Here, we will look into the principles of the card payment
lifecycle, discuss these participants, and the details that should be paid
special attention to.
Every transaction involves at least four players and most
involve more: as many as five or six other entities can be involved dependent
on the model. This complicated series of interactions protects all parties,
ensuring that funds are properly transferred for real and valid transactions
and to identify and block fraudulent ones.
The cardholder/buyer:
The cardholder is the person or business that holds and
makes purchases offered by the bank. In fact, the customer is the main driver
of changes and developments.
What is the card issuer/ Issuing bank?
In most instances, it’s the bank that provides debit or
credit cards from the card scheme to its qualifying customers. The issuing
banks are the conduit between the customer and the card networks in this
process that issue cards from the relevant schemes to users.
The issuer is responsible for the payment value on account
of the cardholder.
When receiving the card authorization request from the card
association, the issuing bank either approves or declines the transaction,
depending on the cardholder’s balance and ensures the right authentication
depending on the risk.
The merchant:
The merchant is a retailer or a business operating in any
sphere (retail, hospitality, E-commerce) that sells goods or services to the
cardholder.
What is the role of Credit Card Schemes?
The schemes are the part of the card networks that set rules
for transactions and overseeing the way credit card transactions operate.
Credit card schemes are the core of processing that issue their branded cards
to financial institutions and consumers and thus enable the occurrence of
credit card relationships.
The schemes connect the customers, merchants, issuing banks,
acquiring banks.
The most popular schemes are VISA, Mastercard.
The acquirer (acquiring bank, merchant bank)
The acquirer is the institution that provides a merchant
service agreement to the merchant and processes the card transactions on their
behalf.
An acquiring bank is often referred to as a merchant bank
because they interact with merchants by creating an account (merchant account)
that allows the acceptance of credit and debit cards. Merchant accounts are
essential for those who are going to accept credit card payments, online or
point of sale.
Traditionally, acquirers were banks, innovation in recent
years has seen this landscape evolve to include other financial institutions,
driven by the emergence of fintech.
One of the core responsibilities of the acquirer is to
ensure both the legitimacy and reliability of the business before approving
merchant accounts, ensuring consumers are protected.
These businesses are subjected to ongoing monitoring and
regularly checked to ensure they are compliant to mitigate the fraud and money
laundering risks.
Why are Payment processors so important?
The payment processor enables the technical interaction
between acquiring bank, issuing bank, and merchant, transferring the
information between them and are the central point of payment transactions.
They handle payment processing support, and manage credit and debit processing
for merchants. In other words, they manage the transaction through the payment
processing link. All brick-and-mortar retailers that accept payments at point
of sale, have their payments processed by payment processors.
Processors are sometimes confused with acquirers, but in
fact, they are reliant on each other but are responsible for different
functions. Acquirers issue the merchant accounts and their responsibilities are
financial, while all backup technical work falls on the processors. Processors
authorize and receive transactions and evaluate the validity of the
transaction, whether it’s approved by the issuer, and monitors fraud
possibilities.
Payment gateways work together with the payment processors
for online payment acceptance. In other words, payment gateways can be
described as a virtual point of sale terminal technology for accepting
card-not-present transactions, that enable the transition of the cardholder’s
data to the processor for further processing.
The credit card processing lifecycle is a complex process
that comprises several stages. Here we present you the most basic scheme of
card payment processing. Still, nowadays this lifecycle is getting more
entangled and complicated by integrating different disrupting solutions and
methods for comprehensive payment services.
The process can be presented by the following scheme:
- The
process starts when the buyer provides payment information via swiping a
card, a mobile device, and manually entering the online payment
gateway.
- The
payment information is transferred to the processor, which transmits the
transaction request to the corresponding credit card network, eventually
reaching the issuing bank for authorization.
- The
validity of a transaction is evaluated due to communicating with both the
issuing and acquiring banks. The issuing bank assures the account has
sufficient balance for the transaction and sends an authorization or
decline code back to the card association, that sends it to the acquirer.
- The
acquirer then communicates the authorization to the merchant, who accepts
the payment and issue a payment receipt with a charged amount to the
cardholder. All these actions take place in 2-3 seconds in
real-time.
BATCHING AND CLEARING
The authorization process is real-time and happens within
2-3 seconds for customers’ convenience. Batching is the process that happens
usually at the end of the day. As clients pay with their credit cards at your
store during the day, the merchant’s POS stores approved authorization codes.
Merchants send batches of authorized transactions to their payment processor.
- The
payment processor submits a request to get payment from the multiple card
issuers to the card networks that communicate the appropriate debits with
the issuing banks in their network.
- The
issuing bank charges the cardholder’s account for the amount of the
transactions.
- The
issuing bank then sends the remaining amount to the acquirer deducting the
interchange fee to the acquirer.
- The
acquirer deposits funds into the merchant account.
FUNDING/SETTLEMENT
The final stage is when funds are transferred by the issuing
bank to the acquirer via the card network, which places the funds on the
merchant account. Usually, the time of settlement is agreed upon between the
merchant and acquiring bank in the contract. In some cases, it may be once in 2
or 3 days, sometimes it occurs on a monthly basis.
The card payment lifecycle triggers a complex sequence of
queries that make the card payment possible. The basic knowledge of the process
will help to better orientate yourself in the complicated world of fees and
checks. While fees may remain invisible to consumers, all entities taking part
in the transaction charge their own fees that have to be calculated and
paid.
When you are aware of the processes and participants it’s
time to ensure that your payment acceptance process is optimized to ensure the
profitability business.
