Managing your money

How Card Payments Work

18 July 2017
2 minute read

Emma Doyle

Whether we’re tapping, inserting or swiping credit and debit cards, these transaction actions have become second nature to us. And with the growing popularity of contactless and mobile payments, we can only expect these to increase further.

According to recent findings by Barclaycard, mobile payments are now more popular than ever with users of Barclaycard’s Android Contactless Mobile app spending 90% more in 2017 than they did in the previous year.

There are many benefits to both receiving and making card payments, especially when it comes to easing and speeding up the purchase process, but what actually goes on behind the scenes when the payment is taken?

Before we take a look at what happens, here a few handy definitions:

Cardholder: This is the person carrying out the purchase, e.g the customer in a store buying goods.

Merchant: This is the store or outlet who are selling goods or services to the cardholder.

Acquiring Bank: The financial institution that the merchant banks with.

Processor: Provides a service or device, such as a card terminal, that allows merchants to accept card payments as well as send payment details to the card association.

Card association (or network): These are the card networks such as Visa, MasterCard and American Express who have relationships with various banks.

Issuing Bank: The bank that issued the credit card involved in the transaction.

So now you’re familiar with the different roles associated with the transaction, here’s how it works:

1. The payment goes through the merchant

When the merchant swipes, taps, or inserts the customer’s card, this kicks off the whole transaction process. This will normally take place through a point-of-sale terminal - which is essentially the card machine or card reader. Most of these machines are wired up to a network known as a payment gateway.

2. The gateway sends the transaction information to the processor

The payment gateway then sends details of the transaction, in the form of a request, to the processor which is used by the acquiring bank (the bank of the shop/supplier you’re purchasing from). The processor is then responsible for conducting all transactions with the acquiring bank.

3. The request is forwarded to the card association

When the request has reached the processor, it is forwarded to the card association (or the network) such as Visa or Mastercard.

4. The issuing bank receives the request

This request then gets forwarded on from the card association to the issuing bank (the bank of the cardholder making the payment). The issuing bank will run a quick check to make sure there are enough funds to complete the transaction and whether it can be authorised or not.

5. The bank issues an authorisation

Once the issuing bank has approved the transaction, it issues an authorisation which confirms that the cardholder has enough funds in their account. This is then sent back via the card association (or network) and back to the merchant who will then complete the sale!

So, is that it? Not quite.

Once the item has been purchased, the merchant sends any unsettled transactions via the processor. The processor can then forward these to the issuing bank who debits these transactions to the acquiring bank - in other words, the customer's bank will be asked to pay the merchant’s bank. This amount then becomes available to the merchant who is now in credit.

As you can see, there are actually a lot of technicalities that occur behind the scenes. Luckily for you, as the cardholder, technology has ensured that making card payments is only going to get quicker and easier!

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