Understanding How Payment Processing Works

Learn how payment processing works from authorization to settlement. This comprehensive overview covers key players, the transaction flow, and essential steps involved in electronic payments, ensuring users understand every aspect of the process behind their card transactions.

Understanding How Payment Processing Works

Have you ever wondered what happens behind the scenes when you use your credit or debit card? Many people overlook the complex network that ensures their payments are processed smoothly. The Card Association’s network provides quick, secure transactions for merchants, customers, and financial institutions alike.

Below is a simplified overview of the payment card transaction process from start to finish.

Participants: Several entities collaborate to facilitate each transaction.

Cardholder: The individual authorized to use a payment card

Merchant: The business accepting card payments for goods or services
ISO/MSP: Agencies like IpPay or Wells Fargo Merchant Services that act on behalf of banks to solicit merchants and process card payments

Terminal/Payment Gateway: The device or software used by merchants to connect with the payment network.

Front-End Network: The platform handling transaction approval requests.

Back-End Network: The system managing data from the front-end and settling payments through the interchange system.

Acquiring Bank: The bank managing the merchant’s payment processing contract.

Card Association: The organizations that issue payment cards and partner with merchants for acceptance.

Issuer: The financial institution that issues the card to the customer and manages their repayment process.

Payment processing involves two main steps:

Authorization: An electronic request is sent to verify and approve or decline the transaction.

Settlement: The transfer of funds and clearing of the transaction, ensuring all parties are paid.

This is the process that occurs each time you swipe your card at a store.