Visa, MasterCard, American Express, Discover, JCB, Mir, Networks, Authorizations, Settlements, and more are the focal points of this article, as it delves into the intricacies of card transactions.
The Card Networks
At the core of any card network are its participants. When exploring card network participants online, you’ll often encounter a plethora of entities, including merchants, payment processors, and network giants like Visa and Mastercard. While these players indeed participate in various card transactions, especially in the realm of online commerce, the fundamental actors are the banks. Banks play an indispensable role in every card transaction, with an acquirer bank on one end and an issuer bank on the other. The acquirer bank serves as the transaction’s destination, while the issuer bank acts as the source and is responsible for the card used in the transaction. The network itself serves as the conduit that enables the movement of funds. Apart from card networks, numerous other conduits exist through which banks can transfer funds between each other’s accounts. One such network used for interbank transfers in the US is ACH, short for “Automated Clearing House.” But let’s not diverge from our main topic.
Protocols
Similar to any network, card networks necessitate a common language or protocol to facilitate seamless communication among participants. When a buyer swipes a card at a terminal, ATM, or clicks the “buy now” button on a screen, it triggers a chain of communications. First, it signals a payment processor, which then communicates with the acquirer bank (or directly with an acquirer bank if it provides merchant account services) through a specific card network to initiate the withdrawal of a specified amount from the account held at the issuer bank.
One of the key protocols used in this context is ISO 8583, an international standard for financial transaction card-originated interchange messaging. ISO 8583 defines the format and content of messages exchanged between participants, namely the acquiring bank and the issuing bank.
In-depth exploration of ISO 8583 details is beyond the scope of this a, which aims to provide a general understanding of credit card transaction mechanics. If you’re eager to delve deeper into ISO 8583, keep an eye out for a potential standalone article in the future.
In a payment transaction, the culmination of communication within the card network is the debiting of the payer’s account at the issuing bank and the crediting of the merchant’s account at the acquirer bank. It’s essential to note that all participating banks must adhere to the protocol’s rules. As a merchant, you’ll promptly observe the transaction’s impact on your account balance, which will reflect an increase equal to the transaction amount. Simultaneously, the buyer’s balance will decrease by the same amount. For buyers and sellers, this marks the transaction’s conclusion (most of the time), but for banks, the process continues with settlement.
Settlements
Bank-to-bank settlements entail the transfer of funds to settle transactions and rectify account imbalances. This process is pivotal to the banking system’s smooth operation, ensuring accurate transaction processing and adequate funding for banks to meet their obligations.
Banks engage in numerous card and other transactions throughout the day. At day’s end, banks calculate their net positions based on these transactions. If a bank holds a positive net position, indicating excess funds, it will transfer these funds to banks with negative net positions that require additional funds to meet their obligations.
Fund transfers between banks typically occur through a clearing house, serving as an intermediary. The clearing house consolidates transactions between banks and facilitates fund transfers while ensuring accuracy.
The clearing house reconciles transactions and confirms the correct transfer of funds, ultimately providing each bank with a statement of its net position, representing the final balance of transferred funds.
Bank settlements usually occur daily and are designed to be a swift, secure, and efficient process. Specific details may vary depending on the country, transaction type, and involved financial institutions, but the overarching objective remains consistent: guarantee precise and efficient fund transfers to support banks in fulfilling their obligations.