Working Principle of Payment processing Companies


Working Principle of Payment processing Companies & Credit or Debit card processing is a transaction process that involves different parties. The parties involved are as follows.

  • Card holder, This is the owner of either a credit or a debit card.
  • Card issuing bank or the Card Issuer.
  • Online Payment gateway or Retail Point of Sales(PO). This is a financial institution that provides online payment platform. This platform processes the card transaction.
  • Merchant, The owner of the point of sale terminal or Online payment gateway. Manual transactions take place on POS. This is also called Card Present Transaction. Merchants may also get Virtual Terminal depending upon the approval from the PSP.
  • Merchants bank or the Merchant Account Acquirer. This is the bank that issues the POS device or Online Payment Gateway to the merchant. The merchant gets a special purpose account only for card processing in the bank.
  • Card Network, The card network is the financial institution that produces the credit cards.
  • Card Issuing bank, This is the bank that issues the card to the cardholder.

Step By Step Guide Of Payment Processing.

  • Transaction Request. The Request starts when a consumer or card holder walks into a payment point. He hands over the card to the merchant for onward swiping onto a point of sale (POS) terminal. Card holder can also provide card information to the merchant for online transactions.
  • Keying in of the transaction . The merchant accept either the physical credit card or card information. Card present transaction occurs when the card holder walks into a store to buy something. Card information is used when making online transactions. Online payment gateways are responsible for receiving and processing this information. Most small businesses use either of this options to accept payment from buyers.
  • Sending of Transaction Information to the Processing network. The credit card processor compiles the transaction information. This processor transfers the information received to the card networks. Merchant accounts for high risk industries may have additional filters. These filters help acquiring banks to limit fraud transactions. Some processing banks may implement 3D Secure filter at this step.
  • Transaction Authentication and Forwarding to the Issuer. The Card Brand forwards the transaction information to the the card issuing bank. This entire process happens at a very fast speed.
  • Authentication and Approval Token. Issuing bank authenticates the transaction and responds with the Approval or Decline response. Some card brands self approve or decline the transactions. Various verification process are used for this purpose. Issuer confirms if the credit/debit card owner has the required credit line. In some cases transactions are declined when the issuing bank suspects fraudulent transaction.
  • Response moves back following the same path as origination. When a transaction is accepted or declined the Signal follows through the same path. It finally reaches the merchant. The merchant after approval provides the consumer with whatever good he is buying. A transaction receipt is also issued to the consumer. The merchant doesn’t get credited immediately. It takes 24 to 72 hours of clearing and settling before the merchant finally get credited. The process of settlement also involve the above mentioned parties.

Suggested reading.