This is the three-stage process that starts with the consumer offering their card to pay for goods or services and ends with the merchant receiving the money in their bank account.
This is the process of the merchant getting approval for the transaction from the cardholder’s bank (issuing bank) and at the same completing any fraud prevention checks that protect the merchant and bank from loss.
The transaction is routed from the merchant’s point of sale terminal in the physical store or online store to the cardholder’s bank and back, via the acquiring bank and card scheme using the card scheme’s secure encrypted messaging network.
At the cardholder’s bank, the amount of the transaction is checked against the cardholder’s account to authorise it, keeping a ‘shadow’ of the transaction that reduces the account balance available (known as the ‘available’ balance) for other transactions.
Simultaneously, the transaction is checked for fraudulent activity. For example, if the card has been reported lost or stolen, the transaction will be rejected, and a code describing the reason is sent back to the merchant.
Other fraud checks include velocity checking, where the number of transactions being submitted are compared to the customer’s normal historical pattern, and online transactions are checked against merchants where ‘cardholder not present fraud’ has occurred. Banks use machine learning to handle checking of the huge number of transactions and merchants and to detect patterns of fraudulent transactions to alert card schemes.
These take place during the same day. Clearing is submission of the transactions by the merchant, via their acquiring bank and the relevant card scheme, to debit the cardholder’s account at the issuing bank.
Settlement is the payment of funds to the merchant by their acquiring bank after the card scheme has ‘netted’ the amount due by each bank in the country and normally through the banks’ accounts at the central bank.