Steps In A Payment Card Transaction

Although payment cards also include debit cards (those tied to a consumer''s checking or savings account), this discussion is limited to credit and charge cards. SET Version 1.0 does NOT support debit cards, but in all likelihood will in some future version.

Without considering where the Internet comes into play for charge processing, let''s follow a credit card charge from its origins on a POS terminal to its final resting place -- as a debit to the buyer and a credit to the supplier.

Imagine you''re shopping at Abe''s Corner Store, finished making your selections, and taken your goods to the register for check out. You''ve elected to use your MasterCard that was issued from Bob''s Bank (an Issuer Bank) for payment (POS terminals are everywhere nowadays !). Abe has signed up for MasterCard Merchant Processing Services from Carl''s National Bank (an Acquirer Bank) and is happy to accept your card as payment for your purchase. While Carl''s National Bank provides merchant services for any merchants who sign-up, they''re too small to operate the systems needed to process charges -- rather they commission the work to a third-party processor. Let''s say David''s Card Processing Service handles that work on behalf of Carl''s. David''s Card Processing Service is also the one to set-up the equipment at Abe''s and they''re geared to service the requests that originate from it, as well as from their other customers.

The cashier at Abe''s swipes your MasterCard on the POS Terminal, keys in the amount of the sale, and hits the SEND button. This kicks off the first step of an authorization request. Based upon on the data contained on the card (account number, etc.), the POS terminal knows where the request needs to be routed. Since they''re somewhat intelligent (programmable), POS terminals will typically support a feature known as split-dial to process multiple card brands. With routing information in hand, the terminal initiates a phone call to David''s Card Processing Service that finds the records for your account at Bob''s Bank via the bank Interchange Network. The open-to-buy amount on your account is reviewed, and if it''s sufficient for the sale amount you''re requesting, an authorization code is provided to allow the sale''s completion. This authorization step creates a temporary debit to your account under the assumption that the charge will be settled at some point in the near future. These debits prevent you from exceeding your credit limit with any subsequent charges. They''ll remain on your account until one of two events occur -- either a settlement of the charge is sent in or the debit expires, freeing and returning the requested amount to your open-to-buy availability. The POS terminal then prints out a sale receipt as a record of charge (ROC). The cashier tears it off, has you sign it, checks your signature for a match on the back of your card, hands you the yellow copy, a register receipt, your card, and your goods. While you''ll never actually see what happens to place your charges on your bill, rest assured they will get there indeed.

As these charge authorizations occur, the merchant''s terminal collects what are called capture records that uniquely identify the transactions. These records comprise what''s called a Batch Settlement File. This settlement file may contain dozens, hundreds, or thousands of unique capture records, waiting to be processed through the banks that have issued cards on those accounts represented within the batch. When the batch is deemed sufficiently large (in terms of counts or total dollars), the submission, capture, and settlement processes begin.

The processing steps for charge cards are identical to those for credit cards with the exception of the mechanics in the authorization request and settlement processing. Since charge cards are not based on pre-set spending limits, the notion of an open-to-buy is irrelevant. Rather, charge card systems use other means to authorize or decline a charge request. Some companies use risk models, heuristics, patterns of spending, manual review, etc.

The sophistication in today''s systems also permits card companies to detect acts of fraud during point-of-sale transactions. Since consumer buying habits can be modeled as patterns, any out-of-pattern spending may be deemed suspicious. Often, merchants are asked to call an authorizer (a human being) who asks the Merchant some questions or requests to speak to the Cardholder. On the Internet, this becomes far more difficult to do.

In a closed-loop system, the Cardholder and Merchant accounts are typically operated on the same systems. Settlement (see below) then becomes a matter of debiting one side of the system and crediting the other side without any need to access the banking network, except to collect charges from any other Acquirers who may process charges from the closed-loop system Brand.