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The card payments life cycle explained
May 28, 2021
Consumers experience the credit card lifecycle as a simple, straightforward process where purchases are processed and that the proper amounts are noted to their accounts. That’s great news: payments should be easy for consumers.
But there’s a lot is going on behind the scenes of a payment transaction when you own and manage a business. A clearer window into how credit cards, debit cards and other electronic payments are processed helps you manage your business operations more effectively.
Card-based payment transactions number in the hundreds of billions around the world each year. Those transactions were each unique in their own way. Yet each transaction also followed the same essential steps that make up the credit card processing lifecycle.
This quick introduction simplifies the credit card lifecycle for quick and easy reference. We’ll introduce the major players and the essential payment processing steps that allow business like yours to accept card-based payments.
Who are the players in the credit card lifecycle?
To understand the payment card lifecycle you’ll want to be familiar with all the key players. No two payment transactions are exactly the same and each may travel a slightly different path, yet virtually every card payment transaction involves the following parties.
Acquirers—aka acquiring banks or merchant acquirers—are financial institutions that establish and manage merchant accounts. Every business that accepts credit and debit card payments must establish either a merchant account or a sub-merchant account (where another company provides a merchant account on your behalf). During a card payment transaction, acquirers pass transaction requests and authentication data between merchants and the card associations.
Card associations help connect customers, merchants, issuing banks, acquiring banks. Card brands act as governing bodies of payments processing. Major card brands include American Express, Discover, Mastercard, UnionPay and Visa. Card associations set interchange rates, mediate disputes between issuers and acquirers, and work to promote safe, fast and efficient payments.
The linchpin in the credit card transaction lifecycle is often overlooked: the customer. The customer initiates every payment card transaction by providing their payment credentials either in-person (card-present) or remotely (card-not-present). Transaction amounts are recorded with their financial institution resulting in a credit or debit, depending on the type of account. The customer is also known as the cardholder.
An issuer is the financial institution that issues the credit card to the cardholder. Also known as an issuing bank, issuers provide essential services by connecting consumers to the financial system and facilitating the funding of transactions to businesses. It’s that funding process that provides the financial fuel that enables businesses to survive—and thrive.
Merchants are the corporations, entrepreneurs, sole proprietors and every type of business in between. Merchants like you play a cornerstone role in the payment transaction process by providing the tools of card payment acceptance: a credit card terminal or point of sale system for card-present transactions, secure eCommerce websites equipped with payment gateway, or payments integrated through an ever-growing range of applications.
Payment processors are companies that process credit and debit card transactions on behalf of merchants and their merchant banks. Payment processors are the glue in the magnet that connects all the other players in the credit card lifecycle. Payment processors have evolved beyond their processing functions to offer a full range of payment-related services to help businesses like yours grow by serving your customers more efficiently.
How does the credit card lifecycle work?
The lifecycle of each specific card payment transaction can vary depending on a variety of factors but a few steps in the credit card transaction lifecycle are fixed in place: authorization, batching, clearing and settlement.
The first state in the credit card lifecycle is authorization. A customer presents their payment card credentials to a merchant, either in-person or by some secure remote method. Card information is transmitted to the acquirer and the payment processor. A transaction then passes through the card associations and then onto the issuing bank.
The issuing bank assures the account is in good standing with sufficient balance for the transaction, sending an authorization or decline code back to the card association who then passes it onto the acquirer. The acquirer then communicates the authorization or decline back to the merchant and the transaction is approved (or declined).
Each stage of the authorization process may involve one or more security and anti-fraud filters. The whole process takes place in just a matter of seconds.
The authorization component of card-based payment transactions take place essentially in real-time. That’s necessary to tentatively complete transactions, but it’s not the final act. At this stage transactions are “pending” until the merchant submits a formal and complete accounting of the transaction.
Batching is the process where merchants periodically review and submit final sets of transactions. Historically batching takes place at the end of each business day. Merchants like you can often realize significant cost savings by batching transactions. Though manual batching is still practiced, batching is increasingly an automated process that a merchant can configure with their payment processor or merchant bank.
Once a batch of transactions is dispatched from a merchant, the transactions in that batch begin a journey to reconcile accounts. Batched transactions are then routed individually down the line from the acquirer through the payment processor and card network and on to cardholder’s issuing bank.
Issuing banks then deduct the amount of the transaction from the customer’s account. Clearing is also the stage in the process where interchange fees are deducted by the issuing bank, which in turn shares a portion of those interchange funds with the card networks.
Settlement—also known as funding—is the final stage of the process where the merchant is finally paid. The issuing bank transfers funds for transactions to the merchant bank. Then the merchant bank deposits funds into the merchant account.
The timing of the settlement and funding process is of great concern to many merchants. That’s not surprising given the importance of cash flow to fund operations and growth. Settlement times can vary significantly based on a number of factors for your business.
So that’s the simplified credit card transaction lifecycle. Whether you’re starting a new business or are unsatisfied with your current payment providers, find out how Worldpay can help connect your business to the future of commerce.