While we might take them for granted, card payments are a pretty ingenious innovation that has helped develop and streamline the world of commerce. The clever system behind debit and credit cards has created a quick, safe and cashless way to perform transactions all over the world. To help you understand how, we’ve put together a quick guide of how the card payment system works and who the key players are.
Cardholders are the consumers who use debit and credit cards from the card issuing banks.
Card issuing banks are financial institutions which are connected to the card networks and who are responsible for issuing cards to the cardholders.
Merchants are the businesses who accept the cards as a means of payments.
The merchant’s bank maintains the merchant’s account where the money from the card transactions is deposited.
The Acquirer is the financial institution that is responsible for processing card transactions on behalf of the merchant.
Payment service providers sell payment services, like online checkouts or terminals, to the merchants. These are often bundled with other services like reconciliation and financial reporting.
Payment gateways are the technical platforms that communicate the transaction information between merchants, card issuing banks and acquirers. In some cases, as with Bambora, the same company can serve as both the acquirer, payment service provider and payment gateway.
Card networks, like Visa and Mastercard, are in charge of the infrastructure that connect all the parts of the ecosystem. They also set up the rules that govern all card based transactions and monitor compliance. Both Card issuing banks and acquirers have to be part of these networks in order to handle the transactions.
When cardholders want to buy something from a merchant they either put their card into the card terminal (in-store) or enter their card details into the merchant’s checkout page (online).
The first thing the merchant has to do is to make sure that the card is valid, hasn’t been reported stolen and check that it’s really the cardholder who’s making the purchase. This is done through something called an authentication.
The process starts with the acquirer who takes the authentication data, either from the terminal or checkout page, and sends it to the card network via the payment gateway. The card network then asks the bank who issued the card to verify that the card is valid and that the security data (i.e. PIN or password) is correct.
The card issuing bank then sends its response back the same way to the terminal or checkout page so that the purchase can continue or be declined.
For online card transactions the security protocol 3D Secure is used to verify the identity of the cardholder and for in-store payments this is usually done by entering the PIN (Personal Identification Number) into the terminal keypad.
Once the card has been authenticated, the acquirer can now ask the card issuing bank to authorize the purchase itself.
The authorization follows the same flow as the authentication, but this time the card issuing bank checks that there is money in the cardholder's account and allows the acquirer to “capture” the amount of the purchase. This means that the issuing bank reserves the amount of the purchase on the card holder’s account to be transferred later.
Thanks to the effectiveness of the card payment system both authentication and authorization is done in a matter of seconds.
As mentioned above, the actual transfer of money from the cardholder’s account to the merchant’s account doesn’t happen at the time of the purchase. For merchants to actually receive the funds from their transactions they have to send over “capture” information for the transactions to their acquirer. For instore merchants, for example, this is done by following the terminal’s end-of-day routine.
The acquirer takes the capture information from all its merchants and combines it into what is called a clearing record that is sent to the card network.
The card network receives clearing records from many acquirers from around the world and each day they calculate how much every individual card issuing bank has to transfer to each acquirer. That money is then transferred all at once and this is referred to as settlement. The acquirer then deposits money for all the merchant's transactions into their bank account.
Bambora offers payouts on the day after the transaction for most of our merchants. For purchases done in certain currencies and for merchants in “high-risk” industries, payouts can take a few days longer.
Another important feature of the card payment system is that it handles refunds and, in cases where the card holder disputes a transaction, chargebacks. If you want to know more about how the chargeback system works you can read our article “How chargebacks work”.