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Card payment and settlement

Learn how card payments are processed to help you make an informed decision when choosing a new provider

An introduction to the card payment and settlement process

Payment cards are the leading payment instrument in the world, used by consumers to initiate over 1.8 billion debit and credit card transactions across the UK each month. When your customer chooses to pay for your products or services by card, a complex sequence of events is executed over the 1.5 to 2 seconds it takes for transaction to be approved or declined.
As a business owner, it’s important to understand how card payments are processed and settled to help you make an informed decision when next selecting a card payments provider for your business.

 

Roles involved in card payments and settlements

Cardholders

  • Cardholders obtain a credit or debit card from an issuing bank, using the card to pay for goods or services.
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Merchants

  • Merchants are any type of business that accepts card payments in exchange for goods or services.
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Acquiring banks

  • Acquiring banks or merchant banks are the banks, credit unions or other financial institutions that provide the merchant account and maintains the necessary relationships (card scheme memberships) with Visa, Mastercard, Amex, and the other card networks (card schemes). Merchant accounts allow merchants to accept deposits from credit and debit card payments. The merchant account is effectively a virtual bank account used to hold funds from the point they’re charged on the customer’s card to when they’re deposited into the merchant’s business bank account. Acquiring banks settle transactions for merchants into this account. The acquirer will also deal with any chargebacks and/or disputes or requests for information that might be received from card issuers on any of their merchant’s transactions. The acquiring bank therefore underwrites the merchant account, assuming the risk of card fraud and chargebacks, and effectively provides a line of credit to the merchant. Acquirer fees make up about 5% to 20% of the total cost of card processing.
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Payment processors

  • Payment processors are companies that process credit and debit card transactions. Payment processors connect merchants, merchant banks, card networks and others to make card payments possible. There are a broad range of fees associated with payment processors, including start-up fees, transaction fees, chargeback fees, termination fees, and lease charges for credit card processing equipment.
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Issuing banks

  • Issuing banks are the banks, credit unions and other financial institutions that issue debit and credit cards to cardholders through the card associations such as Visa, Mastercard, and American Express. It’s the issuing bank’s job to pay the acquiring bank the value of the card payment transaction. The acquirer then pays the merchant (usually via a payment processor), and the cardholder repays the issuer as per the terms of their cardholder agreement. Because it could take the issuer up to 2 months to receive payment from their cardholder, the issuing bank receives the largest portion of the card payment transaction fee. This is known as the interchange fee and is generally 1.5% to 2% of the card payment transaction value.
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Card associations

  • Card associations include Visa, Mastercard, Discover and American Express. The card associations set interchange rates and qualification guidelines, and act as the arbiter between issuing banks and acquiring banks among other vital functions.
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Payment gateways

  • Payment gateways collect customer card information and encrypt it for later processing. Gateway devices can include Point-Of-Sale (POS) terminals and online payment gateways used in ecommerce websites. Whereas POS terminals are designed for in-person transactions, online payment gateways allow for card-not-present (CNP) transactions in which the buyer and seller never meet face to face. Credit card information is entered on the website, in a hosted checkout form, or on a mobile app. A payment gateway could also refer to phone-based payment apps such as Google Pay and Apple Pay that use QR codes or Near Field Communication (NFC) technology, which are an increasingly popular method used by consumers to pay for goods and services across the UK.

How does a card payment actually work?

Credit card processing works across three distinct phases:

1. Authorisation

2. Settlement

3. Funding

Authorisation

1. The cardholder presents their card (or other secure method) to a merchant in exchange for goods or services. The payment request might originate from a credit card terminal or point of sale system in a brick-and-mortar store, an eCommerce website gateway, through mobile or in-app payment acceptance.

2. The merchant sends a request for payment authorisation to their payment processor using a payment gateway.

3. The payment processor submits transactions to the appropriate card association, for example VISA, MasterCard, American Express, and the transactions eventually reach the issuing bank.

4. Authorisation requests are made to the issuing bank, and include parameters such as CVV, AVS validation and expiration date.

5. The issuing bank approves or declines the transaction. Transactions can be declined for insufficient funds or available credit, if the cardholder’s account has been closed or expired, if a payment is past due or other factors such as suspected card fraud.

6. The issuing bank then sends the transaction approval or denial status back along the line to the card association, merchant bank and finally to the merchant.

That’s the credit card authorisation process in a nutshell.

Settlement and Funding

1. Merchants send batches of authorised transactions to their payment processor.

2.The payment processor passes transaction details to the card associations that communicate the appropriate debits with the issuing banks in their network.

3. The issuing bank charges the cardholder’s account for the amount of the transactions.

4. The issuing bank then transfers appropriate funds for the transactions to the merchant bank, minus interchange fees.

5. The merchant bank deposits funds into the merchant account.

6. The card payments provider transfers funds from the merchant account into the merchant’s business bank account in a period ranging from less than a day to a week

That’s the simplified credit card payment process. Authorisation takes a matter of seconds. Settlement and funding that used to take days are now almost always handled overnight, helping you get your money quickly.

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