Credit Card Processing
This is a great article I found at IBM. The whole article is entitled:
Show me the money!
Electronic payment processing for Web businesses
Processing online credit card transactions is the same as face-to-face
credit card transactions, except that the online transactions have to
be routed through the payment networks.
issuer. It registers the card holder, issues a card and operates a card
account to which payments can be charged. Merchants who want to accept payments must establish an Internet merchant account with a bank, called the acquiring bank, or acquirer. The acquirer processes the
credit transaction through the card networks and then deposits the
funds in the merchant’s bank account.
To process credit cards in real time, merchants must establish
a gateway connection from their Web site to the processing networks.
Gateway connections can be made by purchasing and installing software solutions, developing in-house solutions, or by contracting with an outsourced gateway provider. Or, to avoid a gateway connection, merchants can capture the customer payment information and then re-key it into the in-store payment systems. Customer payment information can also be obtained by mail or telephone, called mail order/telephone order (MOTO) transactions.
The first step in online credit card processing is to get authorization by the issuer. The issuer verifies a cardholder’s information by matching it with the information it has and returns the status. Authorization can be done in real-time using the gateway connection or in offline mode. In offline mode, merchants might use a batch-style processing architecture, whereby the credit cards are authorized in large batches at a scheduled time. In this case, customers won’t be asked to wait for their card to be authorized, but may get a message from the Web site stating their order was received and will be processed. Later, the system might send the customer an e-mail with notification of a successful card authorization (or failure).
After authorization, merchants initiate the process to receive payment, which involves three steps: capture, clearance, and settlement. The payment information received from authorization is
captured only after the purchased products have been shipped to the
customer. This information is transmitted to the acquirer for clearance
and settlement of the transaction. Clearance is when a credit card
company collects data about a transaction from the acquirer and
delivers the data to the issuer. The issuer will use the information to
post the transaction to the cardholder’s account.
Merchants electronically submit all credit card transaction data to the acquirer, who then credits the merchant’s account for the total amount of the transactions and seeks settlement with the issuer.
The acquirer sends the card payment instructions through the national
credit card networks (Visa, for example). National credit card companies sort all of the credit card transaction data and transmit the
data to the appropriate issuer.
The transaction is settled when the credit card company
collects funds from the issuer and pays funds to the merchant’s bank
for the cleared transactions. The card issuer pays the national credit
card company, using Fedwire as the payment channel, transferring funds by authorizing the Federal Reserve to electronically debit its account at the Reserve Bank for the net settlement amount and to transfer the funds to the national credit card company’s settlement bank account. This bank then pays the acquirer, using Fedwire.
To summarize, the typical steps to process an electronic transaction involving credit cards are:
- Buyer sends payment information to the merchant server. Merchant software must send and receive messages; encrypt and decrypt; store public and private keys; and request and receive certificates.
- Merchant software takes payment information from the cardholder and sends it to the acquirer (merchant’s bank). Acquirer institution must receive and authenticate payment information the merchant received from the cardholder.
- Acquirer sends an authorization request to the issuer over the
interbank network. Issuer sends the authorization response to acquirer. - Acquirer notifies merchant about the status of authorization; if the response is positive, merchant fulfills the order.
- Merchant presents the charge to the acquirer bank.
- Acquirer sends a settlement request to the issuer.
- Issuer charges the buyer’s credit card account and at regular
intervals notifies buyer of the transactions and accumulated charges. - Buyer pays the charges to the bank. Acquirer credits merchant’s account.
