How Does Credit Card Transaction Processing Work?
Ever since 2016, we have seen an unprecedented rise in the use of Credit Cards in the country. If you are one amongst the whopping 46 million+ Credit Card users in India, then you should have a fair idea about Credit Card transaction processing. After all, it is this processing towards which all the fee incurred on your card goes.
However, if you do not have the required information about your Credit Cards, here is a quick primer on the same.
Credit Card Processing – The Key Aspects
To better understand the transaction processing of SBI Credit Cards or Citibank Credit Cards let us first take a quick look at the vital players involved in the same.
A cardholder is an individual or entity who holds a Credit Card. It is the cardholder who initiates the transaction processing by presenting the card to the merchant, to make payment.
In this context, a merchant can be defined as a retail business that sells its products or services and accepts a Credit Card as a form of payment for the sold goods or services.
The Acquiring Bank or the Merchant’s Bank may be one of the many banks registered with the leading card associations, i.e., MasterCard, Visa, etc. In this case, the acquiring bank often has a contract with the merchant bank to maintain an account with the bank, and in turn, the bank facilitates the merchant to accept card payments from its customers. Besides, after the sale, the acquiring bank deposits the relevant amount in the merchant’s account.
In some cases, however, acquiring banks choose to stay on the backend, while Membership Service Providers or Independent Sales Organisations undertake the task of maintaining contact with the merchants, while also overseeing their regular activities.
Issuing Bank (Cardholder Bank)
The Issuing Bank, also known as the Cardholder’s Bank, has the onus of issuing the cards to eligible customers. For instance, Citibank is an issuing bank for your Citibank Credit Cards. It is also the responsibility of the issuing bank to pay the acquiring banks the sum of money that the cardholder has swiped or used their card for. Needless to mention, the issuing bank must be a member of one of the card associations to provide the customers with Credit (or Debit) Cards.
Currently, MasterCard and Visa are the two leading card associations in India, and across the globe. These are neither the banks, nor do they issue the Credit Cards. Instead, they are simply facilitators and act as the clearinghouse for their brand of cards. It is the onus of such associations to maintain and expand the card network, and as a result, build their brand. Moreover, these associations work in tandem with the Membership Service Providers, or Independent Sales Organisations to ensure swift processing and seamless payments. These associations govern the qualification guidelines for the banks, and levy the interchange fee, eventually making a profit.
Credit Card Transaction Processing – The Three Stages
Imagine how incredibly fast does your POS terminal passes your information to the processor, after which it is given to the issuing bank through the card network for approval. Then again, the speed with which the transaction is approved or declined is simply amazing. To top it all, you receive a text as well as a mail confirmation regarding the transaction in the blink of an eye.
That being said, there is more to a transaction than what meets the eye. The aforementioned route just describes the first two stages, i.e., the Authorization and Authentication. Even after your payment is authorised and the channel’s authenticity is approved, the third and the most important stage, i.e. Settlement, still remains.
For a payment to get completely processed, it is crucial that all the stages are effectively complete. Failure or even partial failure in any of the steps (or all of them) may result in additional costs or non-clearance of payment, or both.
For your convenience, we have simplified what goes on in every stage of the seemingly lengthy, yet lightning fast transaction process of Credit Cards.
Stage 1: Authorization
This stage starts, as soon as the cardholder presents their card to the merchant, in order to make payment. Once the merchant swipes the card on the POS terminal, the details of the card reach the acquiring bank through a secure phone line or internet connection. These details include –Credit Card Number, Card Expiration Date, Security PIN or CVV, and Amount Payable. The acquiring bank transfers this information to the issuing bank and places the request for the amount.
Stage 2: Authentication
Once the issuing bank receives the information it verifies the credit card’s validity through designated tools such as CVV codes, PIN, Address Verification Service or CID. That being taken care of, the bank analyses the available funds in the card holder’s account (with respect to the credit limit).
Depending on the result of the verification, the issuing bank responds to the merchant, via the acquiring bank through a secure phone line or internet connection. When the merchant receives the authorisation, the issuing bank holds the purchase account on the cardholder’s account, to be processed at a later stage.
Once the transaction is authenticated, the merchant presents the receipt to the customer, and the sale is deemed complete.
The merchant collects all Credit Card transactions of the day and sends them to the acquiring bank in the form of a batch to be processed later.
Stage 3: Settlement
This is the last and final stage of Credit Card transaction processing, wherein the transaction is reflected in the billing statement of the cardholder, as well as the monthly statement of the merchant. After receiving the bill, it becomes the cardholder’s responsibility to clear the same at the earliest possible.
Simultaneously, the batched information sent by the merchant to the acquiring bank is forwarded to the Credit Card network for settlement. Hereon, every approved transaction is forwarded to the respective issuing bank, which transfers the indicated funds to the Credit Card network, at this point; the issuing bank deducts the interchange fee and shares the same with the card network.
The remaining funds are then used by the card network to pay the acquiring bank and the processor.
Finally, the acquiring bank sends the amount of each purchase to the merchant, after deducting the merchant discount rate!
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