Demystifying Payment Processing: A Step-by-Step Guide to Transaction Flows

In an era where transactions occur within seconds, it is easy to overlook the intricate framework behind the scenes. Payment processing involves a complex flow with multiple key players, including cardholders, merchants, acquirers, credit card associations, and issuing banks. To better understand this process, it can be broken down into three main steps: authorisation, settlement, and funding.

Key Players in Payment Processing:

1. Cardholder: The customer making the purchase

2. Merchant: The business selling the product or service

3. Acquirer: The merchant's bank responsible for processing transactions

4. Credit Card Association: The network used to process the card transaction, such as Visa or Mastercard

5. Issuing Bank: The financial institution that issued the customer's credit card

The Three-Step Process of Credit Card Processing:

1. Authorisation

2. Settlement

3. Funding

The Transaction Process Explained:

Imagine purchasing an apple at a local supermarket using a credit card, smartphone e-wallet, or wearable device. Upon tapping or entering a PIN into the Point of Sale (POS) terminal, the processor sends a request for authorisation through the card association network (e.g., Visa or Mastercard). The issuing bank then approves or declines the payment based on the funds available in the customer's account.

If the issuing bank approves the transaction, the approval is sent to the credit card network, then to the acquirer bank, and finally to the merchant terminal. The approval message appears on the terminal, the transaction process is complete, and the customer leaves the store with their purchase.

The following steps, settlement and funding, occur behind the scenes, finalising the payment flow. Although these steps can be more complex, they are crucial to understanding the full payment processing journey.