How card payments work: overview for merchants

From Financial Consumer Agency of Canada

A credit or debit card transaction involves several steps. Depending on the payment card network, the transaction may involve three or four parties, in addition to the network itself:
  • the customer making the purchase 
  • the merchant 
  • the acquirer providing payment processing services to the merchant
  • the financial institution that issued the card to the customer making the purchase

In some networks with a three-party model, the last two roles are played by the same organization.

Steps

Note:

For payment card networks using a three-party model, steps 3 and 4 are generally combined. The merchant’s system will submit information directly to the financial institution that issued the card to the customer, which also acts as the payment processor.

  1. The merchant displays the purchase amount to the customer on a point-of-sale terminal (or on the screen of the customer’s computer or other electronic device) for verification.
  2. The customer presents his or her card for payment (inserts, swipes or taps) and confirms the transaction. (In some cases, such as web transactions, the customer may need to enter information, such as a security code printed on the card and/or the billing address for the card as part of fraud protection measures.)
  3. The merchant’s system submits the required transaction information, including the amount and card number, to the merchant’s acquirer.
  4. The acquirer sends details of the purchase to the customer’s financial institution, either via the payment network or directly, depending on the design of the specific payment network. The customer’s financial institution confirms that funds are available, in the case of a debit card transaction, or that the purchase is within the customer’s credit limit, in the case of a credit card.
  5. During the authorization process, the customer’s financial institution authorizes or declines the transaction and sends an electronic message to the merchant, via the acquirer, through the payment network.
  6. During the settlement process, acquirers receive funds for the total transaction value processed during the period. In turn, acquirers deliver funds due to each merchant. Some acquirers deliver the gross amount and then collect their fees at a later date, while other acquirers may deduct their fees upfront and deliver the net amount.

Note:  Merchant discount rates (MDR) and higher percentages and/or rates that may apply to certain types of cards are established in the agreement with the acquirer.

Rates may vary:

  • among payment card networks
  • among acquirers – there is some room for comparison shopping and negotiation
  • for different categories of cards (for example, premium cards with more extensive rewards programs for cardholders generally have additional percentage rates or fees on top of the MDR)
  • for different types of transactions (for example, a transaction initiated over the telephone or the Internet is often considered “card not present”).
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