There are several stakeholders involved in a payment transaction:
*Before learning how card payments are processed, it’s important to understand who the various stakeholders are in a payment transaction. To learn more, see the previous question.
When a customer makes a credit or debit card payment through a point of sale (POS) terminal, there are several steps that take place behind the scenes before a payment is complete:
Authorization
The merchant’s payment processor will send the customer’s information to the card network (specifically, the card brand that the customer used to make the purchase). This will trigger an authorization request to the issuer.
An authorization request validates that a customer has the necessary funds available on their card to make a purchase, that their card is not lost, stolen or frozen, and their data matches what is on their file.
Authentication
The issuer will verify and validate this information and either approve or reject the authorization request.
Settlement / Clearing
If approved, the issuer’s response is sent back through the card network to the payment processor, and the approval is sent to the merchant’s POS system, confirming that funds can now be taken from the customer’s account.
Fund Transfer
The issuer will send the payment processor the funds that the customer owes the merchant. If funds are coming from a debit account, money will be moved in real time. If funds are coming from a credit card, settlement and fund transfers may take several business days to complete.
Batch
Because this process will happen several times over the course of a single, or several, business days, the merchant can choose to store all their customer’s authorized and authenticated transaction data and submit them to be processed altogether. Moneris recommends merchants close their batches daily.
Issuers are financial institutions, such as banks or credit unions, that are authorized to offer credit or debit cards. Acquirers like Moneris work with issuers during card transactions. During the authorization and authentication phases, the issuer must verify a customer’s card information and approve the request to move money from the customer to the merchant.
All payment transactions carry varying levels of risk. A high-risk transaction is a credit or debit card payment that is more susceptible to financial loss from fraud, chargebacks, and other factors. A low-risk transaction is a card payment that is considered ‘safer’ and less likely to lead to financial loss.
Examples of high-risk transactions include card-not-present transactions through mail order or telephone order (MOTO), manually keying-in card information into a card reader, and the sale of products or services that are of higher value (i.e., jewelry, electronics, furniture, etc.).
Examples of low-risk transactions include card-present transactions where customers can tap or insert their credit or debit cards into a card reader, or online purchases made through a secure, authenticated payment system.
A card-not-present transaction happens when a customer does not provide a physical credit or debit card when making a purchase, whereas a card-present transaction involves providing a physical credit or debit card.
Card-not-present transactions often take place online, over the phone, or through mail order, while card-present transactions take place in-person where a customer will insert, swipe, or tap on a card reader.