Payment Processing 101 is a series of articles written by Chad Corbitt, which explains how does payment processing work.

To many people around the world, having a card with you has become the preferred method of payment. When you use your debit or credit card, you don’t have to worry about carrying a large amount of cash. Many prefer the practicalities offered by card payment. It’s faster, more convenient and an incredible time saver.

Yet a lot of people are unaware of what happens the moment they tap their card. What allows you to carry only your card whenever you’re out? How does the payment card industry work? Who are its key players? As a consumer, what do you need to know about this?

It’s good to understand of how card processing and the payments industry work. This way, you’re aware of the fees involved at various stages of this system.

Let’s Start With the Basics

You may already know this, or are completely new to the topic. Either way, the payment card industry covers the debit, credit, prepaid, e-wallet, ATM and POS cards associated with business. Every payment method uses a very similar scheme, with small differences from one to another.

Once you make a payment, your card or terminal passes the transaction information to a processor. This is immediately passed to the issuing bank. If the bank authorizes the transaction, this goes back to your processor. The entire process takes a couple of seconds and it’s just the first step in a very complex system. Oh, and of course there can be varying other players in the middle. Some of these are middleware, gateways/switches and other value-added players… But let’s keep it high level for 101!

It’s best to provide a bit of context about how various entities partner together to store, process and send card data. These are all key players, holding specific, vital roles within the industry. The payment industry operates as a whole when these roles come together.

Of Cardholders and Merchants

There are five key players within the payments industry: cardholders, issuing banks, acquirers, merchants and card banks. Each participant has its own function and interacts with other key players in different ways.

The first one in our list is the cardholder, which is anyone who owns and uses a bank card from an issuing bank. Most of us are cardholders which use one or several bank cards at our disposal to pay for goods and services. Merchants, on the other hand, refers to anyone (or any business) which sells goods and services.

Yet, for the payments industry, merchants are those who accept cards as a form of payment. To function, merchants must follow industry regulations on secure card payment processing. They also pay for the services provided by the acquirer.

More Key Players in Payments

The issuing bank partners with the card brand to issue a branded payment. Some of these card brands are Visa, Mastercard, American Express or Discover. Issuing banks are responsible for all interactions with the cardholder’s account. They will debit funds from the cardholder when a purchase is made or collaborate with other key players to ensure the transactions are processed properly.

Now that we’ve mentioned card brands, we can go over them as well. These are the individual organizations that oversee the payment card industry. Card brands are responsible for managing the payment networks in which all transaction data runs through. They also develop the rules and regulations required to secure data processing.

Finally, acquirers provide innovative, reliable payment card processing solutions to businesses. They are essential. Acquirers offer a range of products and equipment. They use this to run a payment card, send transaction data and move funds from one key player to another.

Payment Processing 101: Understanding Transactions

“Transaction processing” refers to the routing of payment information. But we’re also talking about all data relating to authorization, clearing and settlement of a transaction. Authorization refers to approving or denying a transaction, while a settlement is the transfer of funds for specific amounts. This is, paying the appropriate parties the amounts due.

For every payment card transaction to begin, you need to have an authorization. To learn how this process works, it’s important to understand that this process has different areas where a transaction is transferred, recorded or reviewed. The process begins when the cardholder initiates a transaction with the merchant. The cardholder’s payment card runs through the merchant’s point of sale (also known as POS).

Then, the transaction data travels from the merchant’s POS through the network to the acquirer. The acquirer’s job is to record the information about the transaction. They will then forward it to the appropriate card brand. The card brand’s job is to record the transaction and apply any fees. The fees cover extra risk or cost the transaction may incur.

Finally, issuing bank receives the transaction data. The issuing bank, in turn, may approve or deny the transaction. The approval or denial is sent back through the network to the card brand and the acquiring bank until the response displays on the merchant’s POS.

What’s the end result? If the cardholder has sufficient funds, these are placed on hold and deducted later on during the settlement process. This may also happen immediately. It all depends, though. Isn’t this fun? There are many reasons to declines a transaction: unavailable funds, perceived fraud or equipment issues. If the cardholder has any issues, they can reach out to customer support or speak directly with their bank.

This is the first in several instalments about the payment process. Please stay tuned to more articles in the Payment Processing 101 series!