Tuesday, 9 May 2017
Billions of times a year, customers break out their credit cards to purchase anything from cappuccinos to college tuition.
In the blink of an eye, the merchant electronically transmits the customer's sale and credit card data over a global network to the customer's financial institution, checking to see that the account can support the purchase. The results of this authorization check are returned almost instantly to the merchant, with anti-fraud measurements applied along the way.
MasterCard and Visa—which both operate interbank networks—have the ability to process hundreds of billions of transactions every year. Together, the two companies account for the vast majority of debit, credit, and prepaid card volume in the United States, covering trillions of dollars that U.S. consumers pay to merchants.
So what exactly happens from the time a customer pays with a credit card until his or her bank settles the purchase? MasterCard says it can process a transaction in an average of 130 milliseconds, but the full behind-the-scenes process involves several steps from authorization to clearing and settlement, which can take a day or more.
Besides the payment processing network itself, MasterCard notes four other main parties that are involved in a transaction: the cardholder, the merchant, an acquirer (the bank handling card processing for the merchant), and an issuer (the financial institution that issued the credit card to the consumer).
MasterCard breaks down the process into these six steps:
1. The cardholder makes a purchase.
2. The merchant's point-of-sale system sends the customer's account data to the merchant's bank as part of authorization.
3. The merchant bank (or acquirer), asks the MasterCard network to obtain sale approval from the consumer's issuing bank.
4. MasterCard sends the purchase data to the issuer.
5. The issuer approves the transaction, alerting the merchant.
6. The issuer sends payment to the merchant's bank, which deposits the funds into the merchant's account. The issuer posts the transaction to the shopper's account.
Visa details a similar process. Its retail payments processing relies on VisaNet, which comprises authorization and clearing and settlement services. The authorization request travels from merchant to merchant bank to VisaNet to issuer. The issuer's authorization response goes to VisaNet, then back to the acquirer, then to the merchant.
The store then deposits the receipt with the acquirer, which credits the merchant's account and electronically submits the transaction to VisaNet for settlement. Visa pays the acquirer and debits the issuer, which posts the transaction to the customer's account and includes it on the next billing statement.
When a merchant receives an authorization, its own payment system creates an electronic draft capture. Merchants store these drafts in batches, in most cases sending them to their merchant bank once a day.
MasterCard and Visa both cite the secure nature of their payments networks and generally do not hold cardholders responsible for unauthorized use of their cards. Consumers should report any suspected fraud to their credit card companies immediately.
But one development worth noting is the transition from customers swiping their cards at checkout to "dipping" them into new card readers. Dipping, which takes a few seconds longer than swiping, involves new credit cards embedded with metallic smart chips that are designed to better prevent credit fraud.
It may take a while for dipping to replace swiping. Many small businesses don't know they'll be responsible for fraudulent charges under new card standards. The chipped cards also have the old-fashioned magnetic stripes used for swiping. Of the roughly ten percent of Americans with chip, most continue to swipe.
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