Single Message System and Dual Message System

We use a credit card at a POS terminal in a mall. When you make a payment in the morning, it might take up to 24 hours for the merchant to get the money. But, when you use the same card at a fuel pump, the payment goes through instantly, and the fuel pump gets the money right away. Both are POS machines, and you're using the same card, so why there is difference? How does one merchant receive immediate payment while another requires time for settlement?

This difference happens because there are two types of messages in payment systems. To really understand this, we need to look at Single Message System (SMS) and Dual Message System (DMS)

Single Message System (SMS)

SMS is type of payment processing system where authorization and settlement of transaction happened in a single message, typically in real time. In this system after the cardholder entre there payment details, the issuer bank immediately authorizes the transaction and transfer funds from the cardholder to merchant account.

How SMS Work

• Transaction initiation
  1. The card holder initiates the payment by swiping or inserting their card at a POS machine or ATM.
  2. The payment request, including card details and transaction amount, is sent to acquirer (merchant bank or payment processor).
• Authorization Request
  1. The acquirer forwards the request to the payment network (Visa, Mastercard).
  2. The payment network identifies issuer and transfers request to card issuer.
• Authorization
  1. The card issuer checks if the cardholder has sufficient funds or credit available.
  2. If the transaction is valid, the issuer authorizes the payment, and a response message is sent back to the merchant’s terminal.
  3. Real-time approval: at this point, the transaction is authorized and the funds are reserved in the cardholder's account.
• Settlement
  1. Instantly after authorization, the transaction is settled, meaning the funds are transferred from the cardholder's account to the merchant's bank.
  2. The amount is immediately deducted from the cardholder’s account, and the merchant receives the funds.

• Example: ATM Machine
  • ATM Card Insertion:
    • The cardholder inserts their ATM card into the machine and selects an option, such as withdrawing money.
  • ATM Sends Request:
    • The ATM sends the transaction request (including the card number, amount, and PIN) to the acquirer (the bank operating the ATM).
  • Authorization:
    • The acquirer sends the request to the payment network (like Visa or MasterCard), which then forwards it to the card issuer (the cardholder’s bank).
    • The card issuer verifies the card details, checks if the account has sufficient funds, and authorizes the transaction.
    • If approved, the authorization message is sent back to the ATM, indicating that the transaction is valid.
  • Real-Time Settlement:
    • The card issuer immediately reserves the funds for withdrawal.
    • The ATM disburses the cash to the cardholder, and the funds are deducted from the cardholder’s account in real-time.
  • Transaction Completion:
    • A receipt is printed, confirming the transaction details (e.g., amount withdrawn).
    • The transaction is fully settled and completed at the same moment.

Dual Message System (SMS)

In the world of payments, DMS refers to a transaction flow that handles authorization and settlement separately, with two messages exchanged between the merchant, payment network, and card issuer

• Why the Name "Dual" Message?
  1. Authorization Message:
     • This is the first step, where the card issuer checks if the funds are available and approves the transaction.
  2. Settlement Message:
     • This is the second step, where the funds are transferred from the cardholder's account to the merchant's account.

• How Does DMS Work?
  • Step 1: Authorization
    • Transaction Initiation: When you make a purchase (e.g., at a store or ATM), you present your payment card to the POS terminal or ATM.
    • Authorization Request: The terminal sends a message to the acquirer (the merchant’s bank) asking for authorization. This message includes:
      • The amount of the transaction.
      • Your card details.
      • The merchant information.
    • Forwarding the Message: The acquirer then forwards this message to the payment network (e.g., Visa, MasterCard).
    • Issuer Approval: The payment network routes the request to your card issuer (the bank that issued your card). The issuer checks:
      • If the cardholder has enough funds or credit.
      • If the card is valid.
      • If the transaction looks legitimate (e.g., no fraud alerts).
    • Authorization Response: If everything is in order, the issuer approves the transaction and sends an authorization code back to the payment network, which then forwards it to the acquirer and the POS terminal. At this point, the merchant can proceed, knowing the transaction has been approved.
      • In this phase, the funds are not actually transferred, only reserved (held) in the cardholder's account.
  • Step 2: Settlement
    • Batching Transactions: At the end of the day (or at the end of a business cycle), the merchant sends all approved transactions to the acquirer for settlement.
    • Settlement Request: The acquirer sends a settlement request to the payment network, detailing the transactions that need to be completed.
    • Issuer Fund Transfer: The payment network routes this settlement request to the issuer, asking it to transfer the funds.
    • Final Transfer: The issuer transfers the funds from the cardholder’s account to the merchant’s bank account, completing the transaction. The cardholder’s account is debited, and the merchant's account is credited.

DMS vs SMS - Key Differences

Feature	Dual Message System (DMS)	Single Message System (SMS)
Authorization	Authorization occurs first, followed by settlement.	Authorization and settlement happen together.
Settlement Timing	Funds are transferred later, after authorization.	Funds are transferred immediately.
Number of Messages	Two messages: one for authorization and one for settlement.	One message: both authorization and settlement together.
Example Use Cases	Hotel bookings, car rentals, high-value transactions.	Everyday purchases, ATM withdrawals.
Transaction Process	Delayed settlement allows flexibility.	Immediate settlement completes the transaction instantly.

Coming to the main question:

Why are fuel pump transactions real-time? The reason is that they are typically processed using SMS. In a Single Message System (SMS), both authorization and clearing happen simultaneously, which enables real-time processing.

If a fuel pump can use SMS, then why don't other merchants use the same POS? Why do they use DMS instead? after all, everyone wants to see the money in their account immediately.

Because

• Nature of the Transaction
  • Petrol Pumps (SMS):
    • Transactions are low-ticket and immediate (e.g., they already filled the fuel).
    • There's no uncertainty about the final charge; that amount is clear, and there is no cancellation risk. The payment is instantly processed.
  • Other Merchants (DMS):
    • Transactions may involve uncertainties (e.g., shipping delays, refunds, cancellations).
    • Authorization ensures funds are available, but final clearing is delayed until fulfillment is confirmed.
• Batch Processing Efficiency
  • Merchants handling large transaction volumes often prefer DMS for batch processing.
  • Batch processing reduces processing fees since multiple transactions are settled together rather than individually.

OK, that’s a great explanation! But when we say Single Message System (SMS), we understand that it includes both authorization and settlement in one go. But what does that really mean? How is the message sent, and how does the payment network or the responsible party know that this is SMS?

When a transaction request is sent from the merchant’s POS terminal or ATM, the payment network can tell if it’s a Single Message System (SMS) or Dual Message System (DMS). This is based on how the transaction is structured and the specific parameters included in the request.

Both SMS (Single Message System) and DMS (Dual Message System) can follow the ISO message standards, which are widely used for financial transaction messages, especially in the context of card-based transactions. One such standard is ISO 8583

How ISO 8583 Relates to SMS and DMS

ISO 8583 is a standard that defines the message format for financial transactions. It specifies how data is structured and exchanged between different entities, such as cardholders, merchants, acquirers, issuers, and payment networks.

ISO 8583 messages typically include several fields (called data elements) that specify different pieces of information, such as transaction amount, merchant details, and transaction type. These fields help identify whether the transaction follows an SMS or DMS approach.

Still curious? We have a separate blog that explains message formatting in a simple way. Be sure to follow that blog, or you can check out this ISO 8583 for more details.