Card Payment Lifecycle

Overview

The card payment lifecycle demonstrates the participation of the key players in the payments ecosystem. The top, black dotted line follows the authorization request for a transaction. The bottom, solid blue line follows the settlement process.

Key Players

  • issuing bankissuing bank - A bank or financial institution that offers payment cards to consumers on behalf of card brands, such as Visa, MasterCard or American Express. The issuing bank extends a line of credit to consumers and is responsible for providing the financial backing for transactions made with the card. They assume responsibility for cardholder’s ability to pay off any debt accumulated with the credit card or line of credit. This bank is also commonly referred to as the issuer.
  • cardholdercardholder - The owner/account holder of the card used for a purchase. When the cardholder is the same individual making a purchase, they are also the customer. / customercustomer - The individual purchasing a good and/or service. A customer can be the same individual as the cardholder.
  • merchantmerchant - A business or individual that sells products and/or services to customers in-store or online.
  • processorprocessor - A catch-all term in the payments industry, used to reference a merchant's payment gateway, acquiring bank, or the acquirer or issuer's processor. Technically, a pure processor securely analyzes and routes transaction data among all pertinent key players from authorization to settlement on behalf of either the acquirer or issuer. Some acquirers and issuers are also processors. It is also sometimes referred to as a payment service provider (PSP).: in Pagos’ references, we will refer to any payment gatewaypayment gateway - The technology provider that facilitates payment processing for e-commerce sites and traditional brick and mortar stores by securely validating card payment details and obtaining authorization for purchases from a payment processor/acquirer. The payment gateway sits—or acts as an interface—between the merchant and the payment processor/acquirer, ultimately enabling the merchants to generate revenue from successful payments., acquiring bankacquiring bank - A bank or financial institution, licensed as a member of a card brand, that creates and maintains merchant accounts. Acquiring banks also take the risk and responsibility for processed transactions, such as any liability for credit risk in the event of merchant insolvency, chargebacks, card brand assessed fines, and penalties. These banks are also commonly referred to as acquirers or merchant banks., payment processor, or payment service providerpayment service provider - (PSP) Third-party organizations that act as a full-service solution for merchants to accept and process online payments. PSPs provide merchants with a payment gateway, as well as a broad offering of other services including multi-currency payment processing, risk management, settlement and reconciliation, and chargeback management. Examples include Braintree, Stripe, and Adyen. as "processor". It’s important to note that if appropriately certified as per the relevant regulatory requirements, any of these providers could perform the services of one or more of these specific key players.
  • card brandscard brands - The payment networks linked to payment cards (e.g. debit or credit cards) of which a bank or any other eligible financial institution can become a member. Members of a card brand have the possibility to issue or acquire cards operating on the network of that card brand. Card brands manage payment transactions—including operations and settlement—between cardholders and merchants according to a set of procedures, rules, and arrangements. They come in two main varieties: a three-party scheme (or closed scheme) or a four-party scheme (or open scheme). Visa and MasterCard are considered four-party schemes. Card brands are also commonly referred to as card associations, card networks, or card schemes.
  • government / regulators: these entities play a critical role in the card payment lifecycle by developing public policy and monitoring commercial activities. The depth of the intervention varies by country and can have significant impacts on business processes of global companies.

Lifecycle

Authorization

An authorization request starts when a cardholder / customer attempts to purchase a good or service with a payment card by providing their card details to the merchant. The request for authorization is sent to the merchant's processor.

From there, the processor submits the request to the issuing bank via the appropriate card brand. When notified, the cardholder's bank (the issuing bank) then approves or declines the card based on any number of reasons, such as the customer's available credit funds, the possibility of fraud, or the validity of the card.

Response

The decline or approval travels back through the processor to the merchant, who will then present a message to the customer to advise them if their purchase was successful.

If the transaction is not successful, many merchants will ask the customer to enter their payment information again or enter new payment details. Such practices are a common way to try to retain the customer and successfully make the sale.

If the transaction is approved, the merchant provides the customer with a receipt or invoice.

Capture Request

Upon a successful authorization, the merchant will also submit a request to capture those funds via the same path as the authorization. The amount of the transaction will then be deducted from the customer's account and the funds remitted to the merchant via the processor.

Settlement

The processor will withhold various processing feesprocessing fees - Fees imposed by card associations or any number of processors (for example, to perform 3DS or AVS which are required in certain circumstances). They're typically charged as either a percentage of volume or a flat fee per transaction. Some fees apply to all transactions, while others apply to specific situations. Processing fees are also sometimes referred to as card association fees. and assessments, such as interchange feesinterchange fees - Fees paid between banks for the acceptance of card-based transactions., for the transaction upon settlement to the merchant.


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