The World of payments part 2: Understanding your credit card transaction

The World of Payments: Understanding Your Credit Card Transaction

Did you ever wonder what really happens when you pay with your credit card? It seems so quick and easy – swipe, tap, done. But there is actually a whole lot going on behind the scenes. We rarely stop to think about it, but these transactions are pretty complex, involving several different players and a sophisticated exchange of information. So, pull back the curtain and take a look at what happens from the moment you present your card to the moment the charge shows up on your statement. In this post, I will walk you through each step, explaining it so you can understand exactly how these transactions work and appreciate the technology that makes them possible. It's more interesting than you might think!.

1. Authorization Request: The Starting Point

When you present your credit card to the merchant, the point-of-sale (POS) terminal captures your card details. This includes your card number, expiration date, and sometimes the security code (CVV). This information is sent securely to the merchant's acquiring bank.

The acquiring bank is like a middleman. It connects the merchant to the card networks (like Visa or Mastercard). The acquiring bank sends the transaction details to the appropriate card network. Think of the card network as a highway for financial information.

2. Network Verification: Making Sure It Is Valid

The card network checks with your issuing bank (the bank that gave you the credit card). It verifies a few important things:

• Is the card valid? Is it still active and not expired?
• Are there enough funds (or credit)? Do you have enough available credit to cover the purchase?
• Is it potentially fraud? Is the transaction flagged as suspicious based on your spending habits or other factors?

This verification helps prevent fraud and keeps the system secure.

3. Approval or Decline: The Decision Time

Your issuing bank decides whether to approve or decline the transaction. If it is approved, the bank authorizes the amount and holds those funds from your available credit. This hold ensures the money will be there to pay for the purchase later.

If the transaction is declined, the issuing bank sends a message back to the merchant, often with a reason (like not enough funds or an invalid card). The merchant can then tell you about the problem.

4. Authorization Response: Letting Everyone Know

The issuing bank's decision (approval or decline) travels back through the card network to the acquiring bank, and then to the merchant. If it is approved, the merchant can complete the transaction.

5. Transaction Completion: The Exchange

Once the authorization is received, the merchant completes the transaction. You get your goods or services.

6. Batching and Settlement: Grouping Transactions

Merchants usually collect all their credit card transactions throughout the day. Instead of sending each one separately, they group them into batches. At the end of the day (or a set time), they send these batches to their acquiring bank.

7. Clearing and Settlement: The Money Moves

The acquiring bank sends the batches of transactions through the card network to the issuing banks. This is when the actual money changes hands. The issuing banks pay the acquiring bank for the transactions. This process is called clearing and settlement.

8. Posting to Your Account: The Final Step

Finally, the transaction appears on your credit card statement. The amount you spent is deducted from your available credit.

The Key Players: Who Is Involved?

• Cardholder: You, the person using the credit card.
• Merchant: The business accepting the credit card.
• Acquiring Bank: The merchant's bank, processing the credit card transactions.
• Card Network: Companies like Visa and Mastercard, running the networks that connect the banks.
• Issuing Bank: Your bank, which issued your credit card.

Security: Keeping Your Information Safe

There are security measures in place to protect your card information. These include:

• Encryption: Scrambling data to make it unreadable during transmission.
• Tokenization: Replacing sensitive card details with a unique token, which is less risky.
• Fraud Detection Systems: Systems that look for suspicious activity.

Understanding these steps gives you a better idea of how credit card transactions work and the security measures involved.