Joosep Kõljalg, works at Skype
I assume that you are asking this question to understand how the money from your bank account ends up in the merchant’s bank account.
As the process is quite long I have divided the credit card transaction into 3 separate steps. These steps or sub processes are as follows:
- Cardholder Verification
- Authorization and capture of funds
- Clearing and Settlement
Everything starts with verification of the cardholder. There are handful of verification methods used with credit cards today. These methods are there to make sure that this cardholder has the right to use the funds on the account that is associated with this credit card. I’m going to cover 3 types of verification methods here, these are used on majority of the transactions today.
Swiping the card
Swiping the card
When the card is swiped, then the merchant is asked to enter last 4 numbers from the card. This is to prove that the the card is actually present in the store and has number embossed on it. Once this is done the Authorization message is sent to the card issuer. Some merchants may ask the customer to sign the printed receipt and might ask to see a ID with a photo on it. Whether they ask for these detail depends on the merchant’s and the acquiring bank’s risk and fraud procedures.
Chip and Pin
Customer enters their credit card to the card reader. They are shown the amount due and asked to identify themselves and confirm the transaction with a PIN code. The PIN code is either checked on card or online PIN, this depends on the merchant POS terminal capabilities. Once the correct PIN is entered the payment is sent for Authorization.
Online
When purchasing online the mandatory fields are always the cardholder name, card number and expiry date. Most merchants and acquiring banks require the use of additional verification methods to be used. These methods typically are Card Security Code (CVV2) and 3D secure. These verification methods (except for 3D Secure) are sent to issuing bank together with the authorization message.
Authorization
Once the cardholder is verified then an authorization message for the payment has been sent to the card issuer. This message and all later messages will be relayed through Card Organization (Visa, MasterCard, Amex, etc) systems to correct issuer. Card issuer will check if the card is active and there are enough funds on the associated account.
- In case there are enough free funds on the account the issuer will debit the account accordingly and will send out OK message to the merchant’s POS terminal.
- If there are not enough funds available or there is other issues with the card, then NOK message is sent to the merchant with the error code.
- Third option is also possible - referral this means that the merchant is expected to contact the card issuer to verify the cardholder.
Depending if the acquiring bank’s processor (might be one entity with the bank) is using Single Message System or the Dual Message System if the financial transaction is completed with authorization or later separately.
- With Single Message System, the POS terminal sends the authorization and capture within one message. This means that the transaction is sent for clearing and settlement at once.
- With Dual Message System the POS Terminal will collect the daily transactions into a batch and send them to the processor all at one for clearing and settlement.
Processor will send the transactions data to Card Organizations on behalf of acquiring bank. Based on that data the card organizations create clearing files that have all the necessary information about the transactions made. Based on the information from clearing files settlement between Card Organizations, card issuer and acquiring bank will take place. Acquiring bank will now debit the merchant’s account with earnings and the process is finished.
https://www.quora.com/What-happens-when-I-swipe-my-credit-card
