Credit Card

COUNTERPARTIES

Card member: You, the shopper who is paying by credit card.
Merchant: The person or business you’re buying goods or services from.
Merchant account: A middleman of sorts that holds your credit card payment since your payment can’t be directly deposited into its final destination, the merchant’s business bank account.¹ A merchant account accepts credit card payments, which can then be transferred to the firm’s business bank account.
Card member’s issuing bank: A credit card purchase is authorized when the bank your credit card is associated with permits the merchant to complete the transaction.¹
Payment processor: A third party that evaluates the validity of your transaction by communicating with the merchant without a merchant account.²

CC SETTLEMENT FLOW

1. The merchant sends a request for payment authorization to their payment processor. 2. The payment processor sends the transaction to the card association before it reaches the issuing bank. 3. Authorization requests are made to the bank. 4. The bank either approves or declines the transaction. 5. The bank sends the approval status back.

CC USER FLOW

1. You find an item or service you’d like to purchase with your credit card. 2. You pay by swiping, inserting, or tapping your credit card at the register, entering your payment details online, or sharing your payment info via phone – assuming it’s a safe and legitimate transaction. 3. The credit card payment terminal or payment gateway, the online equivalent of a physical payment terminal, transmits your credit card and payment information to the payment processor securely. 4. The payment processor evaluates the transaction’s validity by communicating with your credit card’s issuing bank and the business’s merchant account. The results are instantly sent back to the credit card terminal or payment gateway, depending on whether you’re there in person or online. 5. Within seconds, a message appears telling you whether your credit card has been approved or denied. If approved, the business’s merchant account bank settles the transaction. 6. While you receive a receipt and go on your way, the payment processor ensures the funds are taken out of your credit card’s issuing bank and transferred into the business’s merchant account. 7. The business chooses when to transfer the funds from its merchant account into its business bank account. 8. You repay your credit card issuing bank when you pay your monthly statement.

A card indicating the holder has been granted a line of credit. It enables the holder to make purchases or withdraw cash up to a prearranged ceiling. The credit granted can be settled in full by the end of a specified period or can be settled in part, with the balance taken as extended credit. Interest is charged based on the terms of the credit card agreement and the holder is sometimes charged an annual fee.

Participants

Cardholder
Cardholder's issuing bank
Merchant
Merchant's acquiring bank
Credit card association (e.g., Visa, MasterCard, Discover, AMEX, Diners Club)

Authorization

A consumer uses a credit card to pay a merchant.
The merchant sends the encrypted transaction data to a card merchant processor (e.g., First Data Merchant Services) for authorization.
The card merchant processor sends the transaction data to the consumer's issuing bank over the Visa or MasterCard network. The issuing bank is a licensed member of Visa or MasterCard and holds agreements with, and issues cards to, consumers.
The issuing bank authorizes the amount and issues an authorization code or declines the transaction.
The card merchant processor notifies the merchant that the transaction has been authorized or declined. The merchant requests the consumer's signature as authorization for the transaction or notifies the consumer that the transaction has been declined.

Processing

Once authorized, the transaction must be "captured" by the merchant. The capture uses information from the successful authorization to charge the authorized amount to the consumer's credit card. The merchant accumulates captures and credits into a batch, which will be settled as a group. The merchant submits the batch to the card merchant processor to finalize the transactions. (If the consumer returns goods after a transaction has been captured, a "credit" is generated.)

Settlement

The card merchant processor receives the information and settles the batch, then sends ACH items through the ACH operator to the issuing and merchant banks. The merchant's bank is the ODFI, with the card merchant processor serving as an authorized sending point. The operator settles transactions between the issuing and merchant banks. The merchant bank credits the merchant's account.

Mastercard issuer assessment = "Quarterly Mastercard Reporting (QMR) fees" + "GMV-based fee"

Four-Party System

Visa and Mastercard

Three-Party System

American Express

TLDR

Visa, Mastercard, American Express, Discover are card Brands/Associations...also referenced as "Traditional Payments"
Each Brand/Association has their own set of rules that determine how transactions and disputes are resolved between all parties participating in the transaction
Visa, Mastercard are also known as "bank cards" since they are typically issued by a banking institution
American Express is typically issued by AMEX though in some cases, they can be co-branded with a banking institution
Discover is typically issued by Discover, with similar exceptions as AMEX
American Express and Discover are unique since they can represent the merchant and cardholder in a transaction/dispute