You find something you absolutely have to have, slap down a piece of plastic and voilà – it’s yours! Life sure is good, isn’t it? But have you ever wondered what happens behind the scenes, from the time your credit card gets swiped (actually or virtually) until the time the purchase shows up on your credit card statement?
Anatomy of the credit card
Transmission of the account number, a systematic rather than a random combination of numbers, is where it all starts. The account number identifies: the type of credit card being used (VISA, American Express, etc.), a bank number, an account number and a check digit. In the case of America Express, the third and forth numbers indicate the currency.
Equally important is the magnetic stripe on the back and it tells quite a story. For simplicity, let’s just say the stripe contains the account number, cardholder name, country code, expiration date and other validating information that’s unique to the credit card issuer and the banking industry.
The Credit Card “Family”
Quite a few organizations are involved in the credit card purchase and approval cycle. Here are the major ones:
- Acquiring Bank – The bank that the merchant works with to get credit card purchases converted to cash and deposited into the merchant’s account.
- Association – The family of banks and credit card issuers that are behind a branded card. Fort example: Visa and MasterCard are associations.
- Cardholder – That’s you and anyone else who carries a credit card.
- Independent Sales Organization (ISO) – This is the company that provides basic credit card services to the merchant such as merchant accounts and credit card funding reports.
- Issuing Bank – The financial institution authorized by the Association to issue credit cards to cardholders.
- Merchant – A place of business that is authorized to accept credit cards for purchases.
- Payment Gateway – The company that provides the credit card processing terminals and network that ties the merchant to the credit card processing network.
- Payment Processor – The company that moves the approved funds between the various financial accounts that exist between the cardholder and the merchant’s bank.
The multi-step authorization process goes on hundreds of millions of times every day. This behind-the-scenes flow of data forms the foundation of credit card purchasing.
- The cardholder initiates a purchase from a merchant.
- The merchant access the Payment Gateway and transmits the customer’s credit card and purchase details.
- The payment gateway looks up the merchant’s acquiring bank and ISO details and forwards the transaction to the appropriate Payment Processor.
- The payment processor determines the Issuing Bank’s ID and sends the transaction information to that bank.
- The issuing bank verifies the customer’s account status, open-to-buy limits and security details. If everything is in order, the bank deducts the amount of purchase from the cardholder’s available balance (open to buy) and transmits an authorization code back to the payment processor. If there is any problem with the transaction, the issuing bank transmits a “transaction declined” message. In cases of fraud, the bank may also issue an order to pick up the card.
- The payment processor passes the approval or decline code back to the payment gateway.
- The payment gateway passes the approval or decline code back to the Payment Gateway.
- The Payment Gateway displays the message to the merchant who either completes or terminates the transaction.
End of Day Settlement
At the end of each day, the merchant performs a “capture routine” which sends details on all completed transactions to the Payment Gateway. The Payment Gateway passes the data up the chain to the Payment Processor which determines which issuing bank to send the transaction to. The issuing bank electronically transmits the money to the acquiring bank which transmits it to the merchant’s own bank account. And everybody is happy.