Card Payments - Part 1 (Auth)

 

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Card Payments is a very vast domain and covering it through a blog becomes more challenging. This blog aims to give a high-level understanding of Card Payments in the most structured and organized way. Today world is moving at a great pace and hence stress would be laid in bestowing benefits to almost all groups influenced by Card Payments under professional and domestic growth. The topic will focus gradually on exploring the functionality and the mechanism behind this one of the most used methods of the payment system. 

Participants

1. Acquirer
   An Acquirer is a financial institution that processes transactions on behalf of a merchant. It holds the merchant's bank account and facilitates the acceptance of payment cards.

2. Merchant
   A merchant refers to a business, either physical (Card Present) or online (Card Not Present), where a customer makes a purchase using a card issued by a financial institution (Issuer). The Point of Sale (POS) terminal used for in-store payments is provided by the Acquirer. Essentially, the POS terminal and the Acquirer are closely related, with the Acquirer enabling the transaction.

3. Issuer
   An Issuer is the financial institution that provides the payment card to the customer. It manages the customer's account and authorizes transactions made with the card.

4. Customer
   The customer is an individual who holds an account with the Issuer. They initiate transactions by providing their payment credentials, either physically (Card Present) or remotely (Card Not Present).

5. Card Association / Payment Scheme
   These are networks that facilitate the processing of card transactions between merchants, acquirers, and issuers. They act as intermediaries to ensure smooth transaction flows. Payment schemes act as the enforcement agency for the rules set by PCI by certifying the institutions on the latest release following the PCI compliance. Some of the examples of Payment Scheme are Mastercard, Visa, American Express, JCB, Discover and Diners Club.

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Transaction Lifecycle (I've explained it in the simplest way possible, avoiding complex jargon for easy understanding)

Step 1: Authorization

#1. Let's say the Customer has the Credit Card of AXIS Bank. The Cardholder requests a purchase from the merchant. In this case, AXIS Bank is an Issuer. 

#2. The Merchant submits the request to the Acquirer. Merchant has the Bank Account with HDFC Bank. In this case, HDFC Bank is an Acquirer Bank.

#3. The Acquirer Bank doesn't know that this Card belongs to which Bank. Let's say the swiped card belonged to the Mastercard. How to identify this? Using BIN. Hence, Acquirer Bank sends this request to the respective Payment Scheme i.e. Mastercard.

#4. Now Mastercard knows that this Card belongs to AXIS Bank. But how Mastercard knows that it belongs to the AXIS Bank. Because AXIS Bank has tie-up with Mastercard and that is the reason the issued cards by the AXIS Bank has the logo of Mastercard on them. Mastercard allots a special series of BIN (Bank Identification Number) to each participating Issuing institution. Using this BIN, the Payment Scheme example Mastercard knows that the presented transaction by the Acquiring Bank (HDFC Bank) has to be sent to the AXIS Bank for confirmation. 

#5. Now Mastercard routes the transaction to the AXIS Bank for Authorization.

#6. An Authorization Code is sent to the Acquirer via Payment Scheme (Mastercard) if there is valid credit is available. 

#7. The Acquiring institution i.e. HDFC Bank confirms the transaction. 

#8. The POS Machine generates the slips and the Cardholder receives the Product/Service.

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Part 2 will cover the following points:

1) Batching

2) Clearing

3) Settlement

4) Chargeback Life Cycle

5) Tokenization

6) Introduction to ISO8583