Demystifying Card Payments

Understanding the key stakeholders surrounding a card payment processing network is important if you want to know where your money is going and how it’s spread across the system. Today, we’ll be looking at the key stakeholders and a short breakdown of how everyone involved makes money. 

Who are the stakeholders?

When going through with an online transaction wherein your debit or credit card is involved, there are 4 main stakeholders.

1. The Cardholder – This is you, the person who uses the card to make purchases, either through an online store or your ride-sharing fees.
2. The Card Issuer – The card issuers are the banks that provide you with the card along with its benefits. They are customer-facing.
3. Merchant – This is who you’re buying from. The merchant accepts card payments for the things you purchase.
4. The Merchant Acquirer – This is the institution responsible for onboarding merchants into programs that allow them to process payments through cards, also known more commonly as payment processors

Although the 4-stakeholder system is widely used, exceptions do exist wherein only three parties are involved, and the role of the merchant acquirer and card issuer are combined into a single role. A prime example of this is American Express.

What happens after you give your credentials during card payments

After you enter your card number, there are a couple of important steps that are executed behind the scenes before you can complete the payment for your purchase. The first of the two is authorization. Here, the cardholder’s information and purchase details are sent off from the point-of-sales to the merchant acquirer. From there, the data is passed onto the card issuer for their approval via the card infrastructure. Finally, depending on the response returned by the bank, the transactions are either approved or rejected, and the information is relayed back to the point of sale. On the other end of things, there is clearance and settlement. Once the merchant closes shop for the day, all approved transactions for that business day are sent as a batch request to the merchant acquirer. From there, through the use of an automated cleaning house, the amounts are deposited into the merchant’s accounts and the processing fees are deducted from the totals. Next, the merchant acquirer debits the card issuer’s account and in turn, the cardholder is responsible for clearing the payments due on the card as determined by the card issuer.

How does everyone involved make money?

The straight answer is a bunch of processing fees. Let’s look at a breakdown.

1. Interchange Fee: When a transaction is made, the card issuer is charged with an interchange fee by the merchant acquirer. Although the exact rates vary quite a lot based on several parameters, this fee is usually made up of a percentage of the total purchase plus a fixed cost.
2. Assessments: The card networks themselves require processing fees and are charged through assessments. This is also based on a percentage of the total transaction amount.
3. Merchant Markup: This is the discount rate, once again, per transaction, that the merchants pay the merchant acquirers to avail card payment services. 

Bottom Line

With this breakdown, you should now be familiar with what goes on under the hood when you swipe your card or enter your card number into Amazon when buying something. It’s nice to know how your money is distributed over the card infrastructure when a purchase is made.