Card Processing

The democratization of credit and debit cards has gradually shifted the world to a near cashless society. As a result, card processing of credit and debit cards is becoming increasingly important. As a consumer, we tend to think very little about the back-end process and the constituents involved in handling a transaction. Somehow, the cardholder, merchant, credit card issuer, and the acquiring bank all must synchronize their efforts in a manner such that a transaction can be consummated. These four parties are defined as follows:

• Cardholder: This is simply the person whose name appears on the credit card.
• Merchant: This is the business or stores that are accepting a credit card from its customer.
• Credit Card Issuer: This is the bank that is sponsoring the credit card. In other words, this banks logo will appear on the actual credit card along with a Visa or MasterCard logo.
• Acquiring Bank: This is the bank that actually clears the credit card transaction and moves funding on behalf of the merchant.

There are three distinct stages with respect to card processing. First, is the authorization stage. Second, there is the clearing step. Finally, there is the settlement step. The authorization stage is one where the cardholder essentially requests a loan from the credit card issuer. The task at hand is to determine quickly and accurately whether the card holder actually qualifies for and has the available credit amount they are seeking. If the authorization is accepted, a reply is sent electronically to the merchant indicating approval. Conversely, when available credit is not accessible a declined message is returned.

A step above the IVR service is a standard credit card terminal that would be attached to a phone line or internet connection. This type of card equipment is most prevalent in today's business environments. It allows the business to process payments when the card is present, or also be able to take phone orders from customers and manually key them into the card equipment. Every merchant processing company offers different types of terminals from various manufacturers. Some of the more popular brands include Verifone, Ingenico, and Hyperion.

The next stage is called the clearing stage. This occurs when the merchant acquiring bank requests transactional data including the date, amount of purchase, and location of the store or merchant. This information is vital for processing as it will be used later for preparation of the credit card bill the credit card holder will receive.

Finally, there is a last step commonly called the settlement stage. This occurs when the funds transferred from the card issuer are actually deposited in the account of the merchant who accepted the credit card. It is important to note that even though the funds are deposited in to the merchant account, the card holder still retains the right to declare the transaction as being invalid via a chargeback mechanism. This is unfortunately one of the risks that the merchant bears from the established structure.

What is most noteable and impressive about the entire chain of events that was just described is that it all occurs in seconds. High-volume retailers such as fast-food chains and coffee shops rely on speed in order to properly serve the significant volume of customers they serve daily. Without the advent of the internet and high-speed card processing, it would be impossible to serve as many customers so quickly and efficiently. Commerce at the speed of light! The back end infrastructure of credit card and debit processing has been established. The front end devices will accelerate with innovation and rely on the same back end. As a result, wireless credit card machines, card processing via smart phones, and the concept of a digital wallet are now truly possible.

Card processing has evolved dramatically since the era of the 1970's. It is safer and more efficient to transact via credit cards and debit cards than to carry cash. This seems to be an irreversible trend in spite of the most recent desire by consumers to ratchet down their debts. Even as consumers clean up their balance sheets, the acceptance of credit cards and debit cards has stayed on a growth trajectory.