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Thursday, January 30, 2014

Do you know how a card payment works?

Just a couple of days ago, I was caught into a discussion explaining to a colleague how card payment process works. I thought this is a fair material to be shared. So here it is, in its simplest form. Note that, following simple elaboration does not mean, it is “that simple”. This provides high level of understanding or a basic understanding of how card network works, clears and settles transactions.

Do you know how a card payment is made?
If you are new to Card Payments, just remember ABCF (yes, not D, an F)
  • Credit card presented to merchant for purchase
  • A: Authorization request: Get the authorization from Issuer whether the card is valid or not.
  • Hold placed on credit limit
  • Authorization granted
  • Hold converted to charge/funds remitted through network to merchant
  • B: Batching: An end of day running
  • Charges sent for clearing by merchant/transaction data routed to issuing bank
  • C: Clearing: Debit entries
  • S: Settle: Payment of actual funds, credit entries
Lets imagine Robin (from the BatMan and Robin) is at the Nike outlet counter, and pulling out her brand new platinum credit card(or debit card, for that matter) with a MasterCard(or VISA) network stamped on it from Bank de Papa. She provides the card to the sales person on the cash counter, to charge for the shopping and then return the card.

What happens next?
  • Sales person swipes the card, and wait for the authorization code from Bank de Papa (that is, Issuer)
  • The transaction goes to Bank de Mama (that is, Acquirer), which in turn is routed to Card network.
  • Card network routes the transaction to Bank de Papa (that is, Acquirer)
  • Bank de Papa verifies the card detail, and if valid then provides an authorization code in return, via same path, all the way back to sales person credit card device (that is, Merchant)
  • Merchant runs the end of day, and send the batch to acquirer via card network

  • Robin: Card holder
  • Sales person on the cash counter: Merchant
  • Bank de Papa: Issuer bank
  • Bank de Mama: Acquirer
ŒŽIn case if you are lost in the Robin, her Mama and Papa, following visual will help you understand the complete flow of events.
card payment process
FIG1: Card payment business process flow (Debit Card, Credit Card, MasterCard, VISA, etc)

The messages exchanged are in international standard ISO format, called ISO8583. Checkout my other post to understand the ISO8583 message format.

Clearing and Settlement
Clearing/settlement generally happens through the Card Network settlement bank.
MasterCard transactions are processed through the MasterCard Worldwide Network using Global Clearing Management System (GCMS), and the MasterCard Settlement Account Management (S.A.M.) system.
In case of VISA, the Visa International Base II system clears and facilitates settlement. Settlement is not carried out through Base II; Visa merely provides the data to allow settlement to be carried out.
For settlement in US dollars, Chase Manhattan Bank, New York, acts as the settlement bank. For multicurrency settlement, Chase Manhattan Bank, London, acts as the settlement bank. All members may hold their own settlement account with any other financial institution, such that all requests for funds or payments are ultimately settled through the correspondent services of domestic clearing and settlement systems.
Write to me or comment, if you think you’ve got a feedback.

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Keywords: Gateway, Switch, Middleware, Country Switch, Visa, MasterCard, Cards, Payments, Card Payments, POS, Point of Sale, ATM, Automated Teller Machine, Payment Gateway,

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