How Merchant Processing Works
Merchants, cardholders and financial institutions are all connected with each Card Association’s network, offering the assurance of secure transactions and timely payments. Here is a general overview of the key players, their roles and the process that occurs throughout the payment card transaction lifecycle.
Every payment card transaction involves multiple parties. The following definitions will give you a good understanding of who’s who in the transaction process.
- Cardholder: an authorized payment card user
- Merchant: an authorized acceptor of payment cards for the payment of goods and services
- ISO/MSP (IPPay, Wells Fargo Merchant Services, NPC): entity that solicits merchants on behalf of an Acquiring Bank for payment card acceptance and enables card payments from customers. Acquirer’s generally hold responsibility for providing customer service, merchant-level support, merchant-level compliance with Association rules and underwriting of merchant accounts. (NOTE: to make matters extremely confusing, although the ISO/MSP channel was created by the acquiring banks to penetrate the small-to-medium level merchant market, to assume that dealing with a bank is the best route to “eliminate middlemen” is not a good idea due to the fact that most banks also act as agents for the acquiring banks).
- Terminal / Payment Gateway (IPPay, Verifone, Authorize.Net):the physical or virtual device used by the merchant to communicate information to the Acquirer’s Front-End Network. In the case of a Payment Gateway, it can be defined as an e-commerce application service provider service that authorizes payments for merchants. It is the virtual equivalent of a physical point-of-sale terminal located in most retail outlets. Payment gateways interface with a merchant’s billing system and pass that data to a Front-End Authorization Network.
- Front-End Network (IPPay, Global Payments East, TSYS): the platform that the credit card terminal / gateway communicates with when approving a transaction. The front-end is responsible for the authorization and capture portion of a credit card transaction. Additional front-end platform interconnections may be required to support ACH and debit transactions.
- Back-End Network (IPPay, First Data Omaha, FNBO): the platform that takes captured transactions from the Front-End Network and settles them through the Interchange system. The back-end generates daily ACH files for merchant settlement. Other functions typically handed on the back-end include chargeback handling, retrieval request and monthly statements
- Association (Visa, MasterCard, American Express): the consumer payment system whose members are the financial institutions that issue payment cards and/or sign merchant to accept payment cards.
- Issuer (Bank of America, Citibank, Capital One): a financial institution that issues payment cards and maintains a contract with cardholders for repayment
A Two-Part Process:
Processing a payment card transaction involves two stages:
Authorization, where an electronic request is sent through various parties to either approve or decline the transaction; and Clearing and Settlement, where all parties settle their accounts and get paid.
1. Cardholder presents payment card as payment at Merchant Point-of-Sale
2. Merchant enters card into a physical Point-of-Sale Terminal or submits a credit card transaction to a Payment Gateway on behalf of a customer via secure connection from a Web site, retail location, MOTO center or a wireless device.
3. Payment Gateway receives the secure transaction information and passes it via a secure connection to the Merchant Acquirer’s Front-End Processor
4. The Merchant Acquirer’s Front-End Processor submits the transaction to the Association Network (a network of financial entities that communicate to manage the processing, clearing and settlement of credit card transactions)
5. The Association Network routes the transaction to the customer’s Credit Card Issuer.
6. The Credit Card Issuer approves or declines the transaction and passes the transaction results back through the Association Network
7. The Association Network relays the transaction results to the Merchant Acquirer’s Front-End Processor
8. The Merchant Acquirer’s Front-End Processor relays the transaction results back to the Payment Gateway / Point-of-Sale Terminal
9. The Payment Gateway stores the transaction results and sends them to Merchant
10. Merchant receives the authorization response and completes the transaction accordingly
Merchant Settlement and Funding:
1. Merchant deposits the transaction receipt with the Acquirer via settlement batch
2. Captured authorizations are passed from the Front-End Network to the Back-End Network for Settlement
3. The Back-End Network generates ACH files for merchant settlement and sends them to the Acquiring Bank who funds the Merchant Account
4. The Acquiring Bank submits settlement files to the Issuing Banks for reimbursement via the Interchange Network
5. Issuer posts the transaction to the Cardholder account and sends the Cardholder a monthly statement
6. Cardholder receives statement and pays Issuer.