Online Card Transactions Primer
When Bank of America launched the BankAmericard in 1958, they might or might not have realised that the technology they were building would turn out to be the most used payment method in today’s world.
Cards and the technology associated with them pre-date the Internet, and there’s a lot that goes on behind the scenes once you enter your card details and click “Pay” on, say, Amazon. This article aims to explain the players and processes involved in the lifecycle of a card transaction during online payments.
Let’s begin with the players involved.
- Cardholder:- Cardholders are people like you and me, who are issued cards by our banks.
- Merchant:- A merchant is the owner of a company to whom the payment is to be made — for example, Amazon.
- Acquirer or Acquiring Bank:- Acquirer is the merchant’s representative(or the merchant’s bank) in the financial ecosystem.
- Payment Aggregator/Payment Processor:- They provide the technical infrastructure to process the card payments on behalf of the merchants — for example, Stripe or Razorpay. Sometimes, the aggregator can also play the role of an acquirer by providing special accounts to merchants(we assume this in our article and use the terms aggregator, processor and acquirer interchangeably). The aggregator also provides the merchants with a Payment Gateway, using which customers can pay the merchants via several payment methods like Net Banking, UPI, Wallets, and Cards.
- Card networks:- Card networks provide virtual payment infrastructure and a secure network over which card transactions can occur — for example, Visa, Mastercard or NPCI(RuPay).
- Issuer or Issuing Bank:- Issuing banks issue cards to cardholders. While they provide the financial support for the card, the card networks provide the technical support, and that’s why we usually see the logo of the card network along with our bank’s on our cards.
Now that we know who’s involved in a card transaction and what their roles are, let’s talk about the lifecycle of a card transaction and the processes involved in it.
Authentication
The first stage of processing a card transaction is to determine whether the customer is legitimate or not. The identity of the customer, including their card number, is verified for admissibility.
When a customer visits a merchant’s checkout page and clicks “Pay” after entering their card information, the merchant contacts the acquirer to process the payment on their behalf. The payment gateway provided by the acquirer will securely encrypt the data to be sent to the acquirer’s server. In order to facilitate the payment, the acquirer interacts with the card networks. The acquirer sends a request for authentication to the card network first. The card network then relays this request to the issuing bank, which verifies the legitimacy of the customer. After verifying the customer, the bank replies with a 3D Secure(3 Domain Secure, the three domains being the acquirer, card network and the issuer) page, where the customer is prompted to input a one-time password. The transaction proceeds to the next stage if the customer enters the correct OTP or is shown an error page otherwise.
Authorisation
The acquirer then sends a request for authorisation to the card network. The card network then sends the request to the customer’s issuing bank, which determines whether or not the payment is valid. The bank performs various health checks on the customer’s account, such as verification of transaction limits and availability of account balance. If authorised, a hold for the transaction amount is put on the customer’s account. The response is then forwarded from the bank to the card network and subsequently to the acquirer, once authorised (or not authorised). The acquirer finally informs the merchant whether the payment was successfully authorised or not, and the merchant informs the customer about the same by redirecting them to a “Payment Successful” or a “Payment Failed” page. The involvement of merchants and customers in an ideal payment ends here.
Clearing and Settlement
Although the authorisation request has been completed and the customer has been informed of the transaction’s success or failure, no money has yet moved between banks. Following each authorisation request, acquirers record the data of all authorised transactions. This data is then sent in bulk to the card network, which breaks them down into separate clearing files and sends them to the Clearing House(This could be the issuing bank itself or an independent entity that finalises the transactions and settles the amount).
In case a transaction is not captured(i.e., sent for clearing and settlement) until a certain period of time, it is automatically reverted and the customer receives a refund. This is why we see a “Your amount will be refunded in 7–14 business days” in case something goes wrong and the acquirer fails to capture your transaction.
Settlement is the stage where the actual money movement takes place. The issuing banks validate the clearing files and begin the process of debiting the cardholder’s account and crediting the merchant’s account, i.e. an exchange of funds between the issuing and acquiring banks.
Reconciliation
Reconciliation is the process of determining whether or not the money that was expected to be received has been received. This is where the acquiring bank compares the transactions collected during authorisation to the transactions received from the banks during the settlement process. If the expected and received transactions do not match, acquirers may take up necessary actions to resolve the issue. The lifecycle of an ideal card transaction ends here.
Disputes
A dispute occurs when a cardholder raises a question about payment with their card issuer. This can happen for various reasons, the most common of which is that the consumer did not receive the goods they expected or did not recognise the transaction at all. The following processes may occur following the filing of a dispute:-
Inquiry or Retrieval:- Some card issuers may open an investigation into the disputed payment and seek additional information. Inquiries or Retrievals are the most common terms for these requests. When the acquirer receives one of these requests, the merchant is given the option of accepting the dispute and returning the funds to the customer or providing evidence to defend the dispute. If the merchant wishes to contest the dispute, the evidence is submitted to the issuing bank via the card network, after the acquirer and the card network have determined that the evidence is valid. The dispute is dropped if the evidence is deemed viable by the issuing bank or converted into a Chargeback if it is not.
Chargeback:- This might either be the first step in the dispute resolution process or a follow-up to an Inquiry or Retrieval. The issuing bank has the authority to deduct funds directly from the acquirer, and hence the merchant, in the event of a chargeback request. When a chargeback request is sent, the merchant is given another period of time to accept the dispute or contest it and provide evidence. If valid proof is submitted, it is sent to the issuing bank via the card network in a process called Representment. Then, the issuing bank has time to investigate and make a final judgement. If the proof is found to be sufficient, the deducted funds are returned to the acquirer, who then returns them to the merchant.
Pre-arbitration: If the evidence is not deemed sufficient, the dispute cycle enters a phase known as Pre-arbitration. The issuing bank presents the acquirer with their dissatisfaction with the evidence submitted. The merchant at this point can accept liability or file for Arbitration.
The merchant needs to be extra careful here since losing a dispute costs a large fee.
Arbitration:- In case the merchant files for Arbitration, the case is taken to an impartial third party, usually a card network. The card network then makes the final call regarding the dispute, which is final and binding.
And that finally brings us to the end of the lifecycle of a card transaction. The technology behind card transactions involves several processes, abstracting away the complexities of the financial ecosystem, thus making our lives much simpler. I hope this article helped you understand what happens on the backend of a card transaction and helped you appreciate technology a tiny bit more!
