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Payments 101: Credit Card Transaction Flow  

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A Quick Guide to Credit Card Payment Processing 

While there are many ways to pay for things, credit and debit cards are particularly prolific. In the U.S., paying with a credit card is usually straightforward, but behind the scenes, there’s a complex ecosystem with millions of lines of code, thousands of professionals, and hundreds of miles of data servers. 

This article takes you behind the scenes, introducing the key players and processes that make a card payment happen. 

A theme of two sides 

Every transaction involves two parties: a buyer and a seller. The industry follows this theme of “two sides” in multiple ways. 

A two-sided industry (or is it two industries?) 

The card processing industry has two distinct but interconnected sets of players – acquiring players and issuing players. Acquiring players focus on serving businesses that sell things, called merchants. Issuing players focus on serving buyers, called cardholders. A variety of company types interact between these two sides, and the lines blur much of the time. 

Acquiring Participants  
  • Merchant: The business, retailer, or any other person, firm, or corporation selling goods or services. The merchant has a processing agreement with an acquirer permitting them to submit payment to the acquirer.  
  • Point of Sale (POS): Electronic software and/or hardware for initially capturing transactions and facilitating the customer checkout process. An eCommerce shopping cart is related to this in that it is a software tool that allows customers to add/remove products and see their transaction details. 
  • Payment Gateway: An intelligent application that routes transactions from a computer terminal or website to an acquirer/processor. 
  • Acquirer: Financial institution or other entity that enrolls a merchant to present transactions to payment networks, and funds merchants for transactions they receive from cardholders. If the acquirer is not a bank, the acquirer must partner with a bank to access the payment networks. 
  • Processor: A data processing company that connects with the payment network for authorization, clearing, and settlement. A processor may be an acquirer and, in some cases, a processor may serve both acquiring and issuing sides. 
  • Payment Network: An electronic network maintained by brands such as Discover, Mastercard, American Express, Visa, JCB, and UnionPay. These networks exchange transaction data between issuers and acquirers. 
  • Sponsor Bank: The sponsor bank is responsible for getting funds to the merchant and ACH payments to the merchant acquirer/processor and paying the payment networks and the issuing bank their share of processing fees. The sponsor bank holds liability for all processing activities of its clients and is responsible for paying fines assessed by payment networks. 
Issuing Participants  
  • Issuer: A financial institution or other commercial entity that that issues a credit or debit card to a cardholder. 
  • Cardholder: Any individual who possesses or uses a payment instrument to purchase a good or service. 

A two-sided transaction 

A transaction is also two-sided, involving authorization and settlement.  

  • Authorization: submitting a transaction for approval from the issuer. This process verifies that a card has sufficient funds to cover the transaction amount. 
  • Settlement: the process of transferring funds between acquirer and issuer, including debiting a cardholder’s bank account and crediting a merchant’s bank account. 

Two transaction environments 

There are two general types of transactions – card present and card not present. 

Card-present transactions involve a cardholder physically presenting a card to complete a transaction. This typically involves inserting, swiping, or ‘tapping’ a card or card-linked digital wallet on a mobile device with a point-of-sale device offered by a merchant. (Click to expand illustration below)

Flow 1

Card-not-present transactions do not involve a physical card reading device. Card details (e.g., card number, expiration date) may be keyed in, for example. These transactions typically take place via eCommerce, mobile commerce (mCommerce), or voice commerce. There are also instances when a card number may be keyed in on a physical point of sale device. (Click to expand illustration below)

Flow 2

The diagram below is a rough example of where revenue from card payment processing goes. Many of these companies play multiple roles. You’ll see that the issuer takes in the most revenue. This is because they assume responsibility for cardholder credit losses and pay for things like growing and managing cardholder accounts.  (Click to expand illustration below)

Flow 3

This is for example purposes. The amounts paid to each part of the ecosystem can vary depending on variables like merchant size, industry, location, pricing model, and onboarding date. 

The largest driver of a card transaction fee is called interchange. This is the base fee that an acquirer/acquiring bank pays to the issuing bank. Card networks like Visa set interchange rates to balance the market and appropriately compensate each player for their role.  

Interchange fees vary based on the card type used in a transaction (like its associated rewards), the merchant’s industry, and other factors that often relate to a transaction’s risk level. 

There you have it, the backbone of the payments industry. Different payment methods and emerging technologies follow different flows and economics but often involve many of the same companies. 

If you’re interested in learning more about payments, we have an education report series that’s great for newcomers and seasoned professionals alike: 

  • Payments 101: industry fundamentals 
  • Payments 201: deeper concepts and current trends 
  • Payments 301: future trends 

These are available in our Essentials package. Click here to continue your learning journey.