The Amazing World of Modern Card Payments

When you swipe, dip, or tap your card to make card payments, you are connecting to an amazing digital network that fires off a series of incredibly complex events in a matter of moments. Here’s what happens when you are at the cash register, kiosk, or online shopping cart when you make a payment.

Balance Authorization

The first series of events that happens when you make card payments is authorizing that the card is linked to an account with enough funds to successfully complete the transaction. When you are at a hotel, car rental pickup, or gas station, the authorization actually takes place before you even know how much the total transaction charges will be to protect the company from providing the service and not getting paid.

When the final amount is ready, or when you check out at most other types of businesses, the funds don’t move instantly from your account to the merchant. Instead, the merchant asks the network your card is using to check with your bank to find out if there are enough funds available, then, that network asks your bank (or another network in between) if the funds are available. Then, it all happens in reverse telling the merchant that the funds are available (or not). At that point, your checkout completes.

So who and what are these networks in the middle? Pull out your credit or debit card from your wallet and take a look for little boxes with company logos. These are similar to the stickers you will find on ATMs that say things like Visa, MasterCard, Discover, Accel, AllPoint, NYCE, Plus, Pulse, Star, Shazam, Presto, Co-Op, and a few others.

Some of these networks are independent, but others are owned by big companies like Visa, MasterCard, Fiserv, and First Data that operate and run the networks. Those big companies operate for their own cards (Visa and MasterCard) or for their own client institutions, like your bank or credit union.

Here’s a more in-depth primer on how debit cards work.

When a customer uses to pay your invoice, you are tapping into an incredible network. Knowing that each payment can hop between networks up to about a dozen times makes that few seconds you have to wait much more tolerable.

Security Checks

While all that payment authorization information is flying around between networks, your bank or a contracted 3rdparty uses complex tools to try to figure out if the payment is actually being made by you or if it is fraudulent.

To do so, your payment is run through one of a few systems, like Falcon from the Fair Isaac Corporation (FICO). Systems like Falcon look at where you live, if you submitted travel plans to your bank, and your typical spending habits to flag suspected payments.

Suspected fraud payments are scored on a scale of highly likely to be fraud to lower risk of fraud. Your bank decided the threshold of what is allowed to go through, what is blocked, or if they should send you a text message or email to ask if it was really you.

These systems are always learning and are incredibly good at what they do. The systems look at everything from location to transaction amount to what you are buying to decide if it was you. Even so, card fraud is over $16 billion per year globally, so these systems have a lot of catching up to do to squash all of the bad guy’s efforts.

Funds Movement

Finally, after the payment is approved and passes the fraud checks, the payment authorization is completed. This all happens in just a few seconds, but the last part takes a few days to complete.

The merchant doesn’t actually get the money until a few days later when the “settlement” process takes place and moves the funds from your bank account to the merchant’s bank account.

When the authorization takes place, your card issuer will put the funds on hold, as they are marked to be sent off to a business in the settlement cycle. That is why you will sometimes see your available balance instantly lower with the transaction visible as “pending” in your account.

Now that you have signed and the transaction is final, the merchant sends a message through to your bank following the same path of networks to let your bank know that the transaction completed and that it’s time to send the funds.

The funds are sent from network to network with encoded transaction details to make sure they get to the right place. Along the way, each network and bank charges a small fee. These fees add up to a few percent of the total transaction that is deducted from what the merchant gets, which is why some merchants charge a credit card or debit card fee on top of the transaction amount.

Because the funds move together in big lumps of payments, teams of accountants at each network and bank work hard to make sure every payment gets to the right place. (Fun fact: this used to be my job!)

You are Part of an Exciting Ecosystem

Every time you use a card, an exciting ecosystem of merchants, networks, vendors, and banks jumps into action to quickly whisk money around the world. As a user, you are a part of all the action!

The Amazing World of Modern Card Payments was originally published on Due on October 10, 2016 by Eric Rosenberg.

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