How does the credit card payment process work?

Understanding Credit Card Payments

Have you ever wondered what happens when you make a payment with your credit card? The entire process is seamless and fast, but behind the scenes, it involves several important steps that ensure the transaction is secure and smooth.

Let’s Break It Down:

• 1. Consumer Ready to Make a Purchase

  The transaction begins when you decide to make a purchase. Whether you’re shopping in a store, online, or using a mobile wallet, you provide your payment information

  • In-store: You swipe, tap, or insert your card into the Point-of-Sale (POS) terminal.
  • Mobile Wallets: In mobile transactions like Apple Pay, your card details are sent via Near Field Communication (NFC) to the POS.
  • Online Shopping: You manually enter your card details or use an online wallet like PayPal.
• 2. POS System Transmits Data

  There’s a critical component between the POS system and the acquiring bank or payment processor. It collects the card details from the POS system (or online checkout) and determines the acquiring bank or payment processor that will handle the transaction. The gateway also ensures encryption and compliance with security standards (e.g., PCI DSS).

• 3. Card Details Transmitted to the Merchant

  Once your payment information is captured, it’s securely transmitted to the merchant's acquirer or processor.

• 4. Merchant Acquirer Forwards the Details

  The merchant acquirer or processor identifies the payment network (like Visa, MasterCard, etc.) and forwards the transaction details to the correct network.

• 5. Payment Network Routes to Issuing Bank

  The payment network receives the transaction request, identifies the issuing bank (the bank that issued your credit card), and routes the transaction details to them for approval.

• 6. Issuing Bank Checks the Details

  The issuing bank receives the transaction request and runs checks to assess the risk of fraud, ensure the account is in good standing, and verify that there are sufficient funds or credit to complete the transaction.

• 7. Bank Approval or Decline

  Based on their checks, the issuing bank either approves or declines the transaction. If approved, they send the response back to the payment network.

• 8. Payment Network Sends Approval to Merchant

  Once the payment network receives the approval, it forwards it to the merchant’s acquirer or processor.

• 9. Merchant Acquirer Sends Approval to POS

  The merchant acquirer then sends the approval to the POS system (or online store), where you receive an authorization confirmation and a receipt.

  • Mobile Payments: The approval and receipt might also be sent to your mobile wallet app or to your email
  • Online Shopping: For eCommerce, the online store confirms the approval on the screen and may provide an email receipt.

Does the process end here? For the customer, yes, the transaction is complete. However, the amount is yet to be transferred to the merchant's account. When does this happen? Let’s explore further.

Clearing and Settlement Process

Once the transaction is approved, the clearing and settlement steps ensure that funds are transferred and finalized.

• 10. Merchant Submits Approved Transactions

  At the end of the day, the business submits a batch of all its approved authorizations to the merchant acquirer, or the merchant acquirer's processor, through a function on its POS device.

• 11. Acquirer Sends Batch to Payment Network

  The merchant’s acquirer sends the batch to the payment network, which then forwards it to the issuing bank.

• 12. Issuing Bank Posts, the Transaction

  The issuing bank processes the transactions and posts them to the consumer’s account statement.

• 13. Payment Network Initiates Settlement

  The payment network calculates the net settlement amounts for both the merchant acquirer and the issuing bank. This involves determining the total amount to be paid to the merchant and any fees due to the payment network or other intermediaries.

• 14. Settlement Bank Transfers Funds

  The payment network submits a settlement request to a settlement bank. The settlement bank then facilitates the transfer of funds between the issuing bank and the merchant’s acquirer.

• 15. Funds Deposited in Merchant’s Account

  Finally, the acquirer deposits the cleared funds into the merchant's account. This process typically takes 24 to 48 hours, though it may vary depending on the acquirer and payment network policies.

For the customer, the transaction ends once it is approved, but the backend processes ensure that the merchant receives their funds.

Clarification on settlement

After Step 12, the funds do not directly go to the settlement account. The issuing bank debits the amount from the customer’s account and records the transaction. However, the actual funds are not immediately transferred to the merchant at this stage.
After Step 13: The payment network like MasterCard calculates the net settlement positions for all parties involved. It sends advisories to both the merchant acquirer and the issuing bank about the amounts to be settled.
Settlement Bank Handles Fund Transfers
The settlement bank, as part of the payment network’s ecosystem, facilitates the transfer of funds.

• issuing bank sends the funds to the settlement bank.
• The settlement bank then transfers the funds to the merchant acquirer’s account.