The Payment Card Process

When a payment happens using a payment card (debit/credit) a verification process happens at the background which will decide whether to approve or reject the transacation. When a customer pays for products or services with a credit card, the card information is recorded—either by manual entry, a card imprinter, point-of-sale (POS) terminal, or virtual terminal—and then verified so that the merchant can receive payment for the transaction.

This process involves the following parties:

• Cardholder: the owner of the card used to make a purchase
• Merchant: the business accepting credit card payments for products or services sold to the cardholder
• Acquirer: the financial institution or other organization that provides card processing services to the merchant
• Card association: a network such as VISA® or MasterCard® (and others) that acts as a gateway between the acquirer and issuer for authorizing and funding transactions
• Issuer: the financial institution or other organization that issued the credit card to the cardholder

The flow of information and money between these parties—always through the card associations—is known as the interchange, and it consists of a few steps:

1. Authorization: The cardholder pays for the purchase and the merchant submits the transaction to the acquirer. The acquirer verifies with the issuer—almost instantly—that the card number and transaction amount are both valid, and then processes the transaction for the cardholder.
2. Batching: After the transaction is authorized it is then stored in a batch, which the merchant sends to the acquirer later to receive payment (usually at the end of the day).
3. Clearing and settlement: The acquirer sends the transactions in the batch through the card association, which debits the issuers for payment and credits the acquirer. In effect, the issuers pay the acquirer for the transactions.
4. Funding: Once the acquirer has been paid, the merchant receives payment. The amount the merchant receives is equal to the transaction amount minus the discount rate, which is the fee the merchant pays the acquirer for processing the transaction.

The above text is extracted from the Bank of America website and the URL is given below.

http://www.bankofamerica.com/small_business/merchant_card_processing/index.cfm?template=card_processing_basics#cardprocessing