Credit card transactions are processed through a chain of connected parties. The five primary parties involved in processing a Visa or MasterCard credit card transaction are:
- The cardholder
- The card issuer
- The merchant,
- The acquirer, and;
- The card Association.
The card issuer is the bank that issues the credit card to the cardholder. The merchant acquirer, often a bank, processes transactions on behalf of the merchant. "Card Association" is another term used to describe Visa and MasterCard.
The use of a card involves an exchange of value between a consumer and a business. The card represents an offer for payment in exchange for the merchant’s goods or services. The sales draft itself is the cardholder’s promise to pay. When an acquirer accepts a draft from merchants, the bank is buying the value represented by the draft and paying the merchant the face value of that sales draft. Collecting payment through the interchange systems is a two-part process:
During the clearing process the acquirer provides the appropriate issuer with information on the sale. No money is exchange during clearing. Clearing involves the exchange of data only. The acquirer provides data required to identify the cardholder’s account and provide the dollar amount of the sales. When the issuing bank gets this data, the bank posts the amount of the sale as a draw against the cardholder’s available credit and prepares to send payment to the acquirer.
The second step is the actual exchange of funds. The issuer sends a record of money that is being transferred from its account to that of the acquirer. From this account the acquirer pays the merchant. Funds are settled between issuers and acquirers through accounts with large banks that are members of the Federal Reserve System and have been selected for that purpose. Payments to merchants are made usually through the Federal Reserve’s Automated Clearing House (the “ACH”) which is an electronic funds transfer system.
II. Transaction Processing
Transaction processing involves front-end processing and back-end processing:
- Front-end processing involves authorization and data capture services and message connections via various communication networks to pint of sale devices.
- Back-end processing provides financial accounting for acquirers and issuers and prepares and submits clearing and settlement data into the Visa and MasterCard interchange networks.
1. Front End Processing
Authorization is the acknowledgement by the issuer that a particular account may be charged for the amount of the sale. The preferred method to obtain an authorization and the one that will receive the lower interchange rate is to swipe a card’s magnetic strip through the point of sale terminal’s card reader. If the card cannot be electronically read by the terminal for any reason, the information may be keyed into the terminal in order to get an electronic response. The request is then routed through the processor’s VAP or MIP to the issuer’s authorization center. The response is returned to the merchant’s terminal. The terminal records the response code which becomes part of the transaction and is included in the clearing data sent through interchange to the issuer.
Authorization may also be obtain through other methods such as voice authorization. The merchant can call an 800 number to verbally provide cardholder information and receive an operator’s response. Other methods such as electronically generated audio responses (ARU) that permit the merchant to use the telephone like a key pad to enter sale information can also be used. If for any reason the issuer or its authorization center cannot be reached, the card Associations will act as stand-in processors to provide authorizations.
Draft capture is the process of transferring sales draft data into electronic format so that it may be sent through the interchange networks for clearing and settlement. Data identifying the cardholder account and expiration date is put into the point of sales terminal, either by swiping the card thorough a card reader or manually keying the information into the terminal’s keypad. The amount of the sales is then entered and an authorization requested. Once an authorization code has been received, the terminal is prompted to store data on the completed sale in its memory.
2. Back-End Processing
Back-end processing involves the various accounting functions that enable transactions to be recorded to the proper merchant or cardholder account. During back-end processing reports are created for distribution to the acquirers that include:
- Settlement data
- Security/fraud data
- Retrieval/chargeback data
- Funds disbursements data
Transactions for internet and other card not present environments work similarly but can have additional processing steps. Both Visa and MasterCard have Internet authentication programs (not to be confused with authorization) named Verified by Visa (VbyV) and MasterCard SecureCode (MCSC) that do alter the transaction process somewhat. If the cardholder is registered with one of these programs, they must provide a pre-registered password at the time of purchase. This password is then passed along as part of the information flow of the transaction (these programs and other techniques for controlling fraud are discussed in more detail later in this section).
Visa and MasterCard offer both signature debit and credit cards to consumers. The primary difference between signature debit transactions and credit transactions are that debit cards are linked to a bank account. Rather than offering the cardholder 30 days of float and the option to finance ongoing balances, debit cards simply debit the cardholder’s bank account for authorized purchases.
Signature debit transactions (which are sometimes also referred to as offline debit, a misleading reference and not to be confused with an offline EFT debit transaction) are different from PIN debit transactions in that the transaction does not involve use of a PIN number at the time of purchase. PIN transactions also are processed on entirely different networks referred to as EFT networks and are discussed in Section IV.