Payment Processing Architecture
Payment processing is what happens when you swipe your debit, credit card or you use your wallets like GPay, PayTM, etc. at a shop or online website.
This article gives you an overview of what happens right from the time you swipe your card till merchant settlement.
So, sit tight and learn.
There are multiple participants in this process and we need to understand who they are and what they do. Despite all these actions and participants, a transaction happens within a few seconds so that customers complete shopping fast. But when it comes to merchant settlement, that is merchant getting money to his back may take up to 3 days.
The following are the participants in this process.
1. Merchant
This is the guy who owns an online shop or a physical shop that accepts card payments.
2. Shopper
People like you and me who do shopping online or on-prem using our credit/debit/wallet cards.
3. Payment Service Provider
The payment industry is very strict when it comes to doing secure transactions. It will be very difficult for a merchant to set up this infrastructure on his own. This is where payment service providers like Instamojo, CCAvenue come into the picture.
Now all a merchant needs to do is to sign up with anyone of them, connect their bank (acquiring bank this is called where a merchant opens his business bank account) and connect this payment service provider, payment processing page to their website. In the on-prem model, acquiring the bank itself will provide card processing machines.
4. Payment Gateway
This is a software on a server at the acquiring bank, where the merchant has his business account. Every transaction that merchant processes will go through this gateway to the acquiring bank. Nowadays banks themselves give the payment infrastructure to online shops. So both PSP and PG are one and the same.
5. Acquiring Bank
As we saw above, this is the bank where a merchant opens his business account, which is called a current account.
6. Issuing Bank
Before a shopper uses his credit/debit card, he needs to get one right? The bank that issues such cards to a customer is the issuing bank. In the case of a debit card, it is directly linked to your bank account.
7. Card Association
This is a consortium where all card providers join to process transactions. Some of the well-known card providers are Mastercard, Visa, American Express, Rupay, etc.,
With this knowledge of payment processing participants, lets now learn how the payment is actually processed.
Payment Processing Concepts
When a customer swipes his credit/debit card, payment details are captured and sent to a payment gateway. Payment gateway, in turn, sends those details to acquiring bank.
Acquiring bank then sends payment details to the card network association and the card provider, for example, the Mastercard then figures out the issuing bank and sends these transaction details to them.
Issuing bank, checks for funds at customer account in case of the debit card or credit limit in case of credit card and if everything is an ok debit customer account or funds from credit card limit holds them and sends its approval. In the case of no sufficient funds, a rejection message will be sent.
Merchant will send approved transaction details though payment gateway in case of POS transactions or wait for the settlement in case of online transactions.
It may take up to 3 days for the issuing bank to process the approved transactions of that day and credit money to the merchant account.
But as I said in the beginning, the customer transaction happens in a few seconds. For this to happen, all intermediaries charge transaction fees. I will explain that in my next article on this subject.
I also talked about how important security is all about. There is a standard for that and it is called PCI-DSS.
PCI-DSS full form is “Payment Card Interface — Data Security Standard” If you are interested in getting in the payment industry, then you cannot ignore PCI-DSS. I will write about this in this series as we cover our basics in this domain.
Hope this article gave you an overview of Payment Processing Architecture and concepts. In my next article, we shall learn about transaction fees and then we shall move on to other concepts and standards.
