Credit Card

TXN LIFECYCLE

AUTHORIZATION
BATCHING
CLEARING
SETTLEMENT

AUTHORIZATION TIME OF PURCHASE FOR DUAL AND SINGLE MSG TXNS

Cardholder submits MasterCard account to merchant
Merchant’s bank asks MasterCard to determine cardholder’s bank
MasterCard authorization system validates card security features and approves sending to cardholder’s bank for purchase approval
Cardholder’s bank approves purchase
MasterCard sends approval to merchant’s bank
Merchant’s bank sends approval to merchant
Cardholder completes purchase and receives receipt

CLEARING USUALLY WITHIN ONE DAY FOR DUAL MESSAGE TRANSACTIONS; TIME OF PURCHASE FOR SINGLE MESSAGE TRANSACTIONS

Merchant’s bank sends purchase information to MasterCard network
MasterCard clearing system validates information and approves sending purchase information to cardholder’s bank, which prepares data for cardholder’s statement
MasterCard clearing system provides comprehensive reconciliation to both the merchant’s bank and to the cardholder’s bank

SETTLEMENT USUALLY WITHIN TWO DAYS FOR DUAL MESSAGE TRANSACTIONS; TIME OF PURCHASE FOR SINGLE MESSAGE TRANSACTIONS

Merchant’s bank sends clearing data to MasterCard
MasterCard calculates net settlement position and sends advisement to merchant’s bank and cardholder’s bank and Transfer Funds Order to settlement bank
Settlement bank facilitates exchange of funds to guarantee payment to merchant’s bank
Cardholder’s bank sends payment to settlement bank
Merchant’s bank pays merchant for cardholder’s purchase
Cardholder’s bank bills cardholder for purchases

TRANSACTION FEES

Merchant Discount Rate
Interchange Fees
Assessment Fees
Processing Fees

ROUTING

Transaction description

Network

Allpoint ATM withdrawal

Allpoint

Non-Allpoint ATM withdrawal

Maestro or Interlink

Gas pump with PIN entered

Maestro or Interlink

Online purchase

Banknet (credit)

Mobile wallet purchase

Banknet

Card-present retail purchase with PIN entered

Mastro or Interlink

Card-present retail purchase with no PIN

Banknet

Fast-food purchase at the drive-through

Banknet

Ride-share purchase through app

Banknet

Food-delivery purchase through app

Banknet

Card load

Banknet or Maestro

Outgoing peer-to-peer cash transfer

Banknet

Credit card payment txn lifecycle

Fiserv Payment Lifecycle

parties

(1) the consumer who makes a purchase; (2) the merchant that makes a sale; (3) the consumer's bank that issues the payment card, called the issuing bank; (4) the merchant's bank, called the acquiring bank; (5) the card or payment network that connects the issuing and acquiring banks; and (6) the payment processor that provides the infrastructure for a transaction, such as card readers.

COUNTERPARTIES

Card member

Merchant

Merchant account

Issuing bank

Payment processor

The merchant - sells a good or service
The customer - uses a payment card to make a purchase
The payment processor - provides technology that moves the request back and forth between the merchant and financial institutions
The acquirer - receives credit card authorization requests and funds merchants for approved transactions
The issuer - provides credit cards to individual cardholders and approves or declines transaction requests based on cardholder account info
The card associations - major card brands (Visa, Mastercard, etc.) that govern the rules of credit card processing

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. 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. Payment processor: A third party that evaluates the validity of your transaction by communicating with the merchant without a merchant account.

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.

CC TXN LIFECYCLE

Step 1 - CUSTOMER

The customer inserts their card into the POS terminal to pay for a purchase.

Step 2 - MERCHANT

The merchant's POS electronically sends the cardholder’s information and transaction details to the payment processor.

Step 3 - PROCESSOR

The processor sends the authorization request to the acquirer.

Step 4 - ACQUIRER

The acquirer routes the transaction request through the issuer for approval.

Step 5 - ISSUER

The issuer receives the validation request. They check to see if the transaction is valid, whether the cardholder account has sufficient funds and if the merchant’s account is in good standing.

Step 6 - DENIED

The issuer sends an “Approved” or “Denied” code, which the acquirer or processor relays to the merchant. If the transaction is denied, the purchase ends here.

Step 7 - AUTHORIZED

If the transaction is approved, the merchant receives authorization and the issuer places a hold for the amount of the purchase on the customer’s account.

Step 8 - BATCHING

The merchant sends a batch of approved credit card transactions to their acquirer. This is generally done at the end of each business day.

Step 9 - CLEARING

The acquirer receives a batch of transactions, collects appropriate funds from the issuers and credits the merchant account.

Step 10 - SETTLEMENT

The acquirer deposits merchant earnings in their business bank account and generally bills merchants for all interchange and related fees in a monthly credit card statement.

Step 11 - CUSTOMER

The cardholder eventually pays the issuer for the purchase, including any accrued interest and fees associated with their card agreement.

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