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 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 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.
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.