Before a credit or debit card holder can complete a purchase of a product or service with her card, the merchant does one of two things: It verifies that the debit card holder's account has sufficient funds to cover the transaction or it verifies that a credit card holder has the available credit needed to purchase the product or service.
If the credit card network confirms funds are available to cover the transaction or that the card holder has the available credit, the network clears the payment and requests payment authorization from the issuing bank. This process allows a merchant to complete the customer account verification process and acquire an authorization code, which is a prerequisite to concluding the sale process.
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The Bank Card Process
To complete either the debit or credit card verification process and the sale process on a noncash basis, an organization must have a merchant account with a bank. Using this account, a merchant forwards the details of the buyer's credit card to the credit card network.
The credit card network clears the payment and requests authorization in the form of a transaction authorization code from the issuing bank. On receipt of the code, the merchant concludes the sale process.
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Each payment system relies on debit or credit card approval codes or "transaction approval codes" to confirm the merchant will receive payment for goods or services sold.
During the authorization phase, the following activities take place:
- The card holder presents a debit or credit card to a merchant at the point of sale for payment of a good or service.
- Once the customer swipes a card on a point-of-sale terminal, information regarding the card and the transaction is sent electronically to the card's acquiring bank or its authorized transaction processor.
- The acquiring bank or its processor forwards the card information to a credit card network.
- The credit card network clears the payment, then requests payment authorization from the card's issuing bank by providing the credit card number, the card's expiration date, the card holder's billing address, the card's security code and the payment amount.
Transaction Authentication Phase
When the merchant bank presents the charge to the card holder's bank through the merchant account, the card holder's bank verifies the card holder's account has sufficient funds or credit to "cover" the transaction. If either is true, the bank transmits an authorization code – a six-digit transaction- and account-specific number – back to the merchant bank, signaling it is OK for the transaction to be approved.
If a transaction triggers a request for funds that are not available or an approval of a purchase that exceeds a customer's credit limit, the card holder's bank declines the transaction and does not issue an authorization code. This response informs the merchant's bank that the card holder's bank will not approve the transaction. The merchant will typically ask the customer to use an alternative form of payment.
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During the bank transaction's authentication phase, the following activities occur:
The credit card network transmits the payment authorization request to the card's issuing bank.
The card's issuing bank validates the card number;
verifies the card holder's account balance or the card's limits; verifies the card's billing address and the related CVV number.
Based on the issuing bank's verification process, it approves or declines the transaction and forwards an authorization code to the merchant via the credit card network and the acquiring bank or processor.
The card's issuing bank places a hold on available credit or account funds in the amount of the card holder's purchase.
The merchant's point-of-sale system saves data related to the approved authorization for further processing at the conclusion of that day's business.
The customer receives a sales receipt from the merchant to conclude the sale.
Transaction Clearing and Settlement Phase
During the transaction clearing and settlement phase, sales transaction data is posted to the monthly billing statements of the card holder and the merchant.
- The merchant transmits the approved authorizations to the acquiring bank or processor at the end of a business day.
- The acquiring processor forwards the merchant's data to the credit card network to settle the approved transaction.
- The credit card network forwards the approved transactions to the card-issuing banks.
- The card-issuing bank transfers funds in the amount of the related transactions, less an interchange fee that it distributes between the credit card network and the acquiring bank.
- The credit card network pays the acquiring bank and acquiring processor transaction fees.
- The acquiring bank credits the merchant's account for the day's card holder purchases less a merchant discount rate.
- The issuing bank posts the sale transaction to the card holder's account.