Payments Explained

What happens after the swipe? There are two main processes: Authorization and Settlement.

The authorization and settlement processes encompass communication between banks, card associations, and payment processors.

Authorization Process

1. Customer presents method of payment – through a point-of-sale (POS) terminal, through an e-commerce website, over the phone, etc.
2. Merchant transmits information to Payment Processor
3. Payment Processor transmits information to Card Associations such as Visa® or MasterCard®
4. Card Association sends information to Issuer or bank that issued credit card to customer
5. Issuer approves or declines the transaction and sends information to Card Association
6. Card Association forwards response to Payment Processor
7. Payment Processor sends response to Merchant
8. Merchant receives response
9. The response is an approval, a decline or a referral. A referral is a request for additional information (either from the merchant or the cardholder) before an authorization can be issued

Settlement Process

After the sale, the transaction is still in process for merchants. Settlement is how the merchant receives funds.

1. Merchant submits approved transactions to Payment Processor, sometimes called “batch processing” or a “batch out”
2. Payment Processor forwards settlement request to Card Associations such as Visa® or MasterCard®
3. Card Association receives request and takes amount of transaction from Issuer (ie. the available balance on the card) and deposits to merchant’s bank account
4. Issuer posts transaction to Cardholder’s account
5. Cardholder receives credit card statement and pays the bill

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