Swiping or tapping our cards has become second nature for most of us, serving as the go-to payment method for everything from morning coffee to online purchases. In 2022 alone, the global volume of purchases made with credit, debit, and prepaid cards, along with cash advances and withdrawals, surpassed $40 trillion for the first time in history, marking a 4.4% climb from the previous year (Globe News Wire, 2023).

As cash gives way to digital convenience, the rise in credit card transactions reflects a significant shift in consumer behaviour and financial habits. Despite the prevalence of card payments, the complex interactions among intermediaries connecting cardholders and merchants remain largely out of sight, out of mind.

Although the process behind a credit card transaction may appear complex, this guide aims to simplify the process. Whether you're new to payments or simply need a refresher, this article provides an accessible overview of the payment value chain players.

Who are the key players involved in a card transaction? 

From the moment a customer taps their card at a local shop to the instant the payment is confirmed, a sophisticated system ensures the transaction is secure and efficient for both the cardholder and the merchant. 

This underlying ecosystem ensures seamless operations with every purchase, showcasing the advanced yet mostly unseen infrastructure that drives card payments. To better understand this infrastructure, gaining some familiarity with the key participants responsible for successful transactions is essential. They are:

• Cardholder

• Merchant

• Acquirer

• Issuer 

• Card Network 

Cardholders

Cardholders are individuals who obtain credit or debit cards from card issuers or card issuing banks. They are the end users who use these cards to pay for goods or services, both in-person and online. They can often benefit from rewards and cashback programs linked to their cards and are responsible for the repayment of any charges made using the card.

Merchants

Merchants are the businesses or entities that sell goods or services to the customer. Although any company selling products or services is a merchant, only card-accepting merchants are relevant in this case. As soon as a customer decides to buy something, it is the merchant's job to be able to accept the customer's payment and have the necessary infrastructure to accept different types of payments that customers prefer using.

Acquirers

The acquirer, also known as the merchant bank, or merchant acquirer, is a financial institution that has a relationship with the merchant. The acquirer facilitates the processing of card transactions on behalf of the merchant. They provide the necessary infrastructure, such as payment terminals or online payment gateways, to enable the acceptance of card payments. The acquirer is responsible for collecting the transaction details from the merchant and forwarding them to the appropriate parties for authorisation and settlement. While customers rely on the services of the card issuer to make card payments, merchants rely on the services of the acquirer to accept cards. Stripe would be an example of a well-known acquirer. 

Issuers

Issuers are the banks or financial institutions that issue credit or debit cards to consumers and manage the accounts linked to the card. When a transaction is initiated, issuers receive the details from the acquirer and must approve or decline the transaction. This decision is based on verifying the transaction's validity, ensuring the card belongs to an authorised user, and checking that the customer has sufficient funds or credit. Once these checks are completed, the issuer responds with a code that goes back through the card network to the acquiring bank, signalling whether the transaction can proceed. They also handle other card-related services, such as card activation, billing, and customer support. For example, Reap is an issuer, as it issues the Reap Card, and also allows other institutions to issue cards via the Card Issuing solution.

Card Networks

Card networks like Visa and Mastercard are critical for every card transaction and they lay the groundwork for the execution of card payments by facilitating the transfer of information and money between the merchant's bank (acquirer) and the cardholder's bank (issuer). The card network ensures that the transaction is authorised, processed securely, and settles the funds between the acquirer and the issuer. As the foundation of the card payment system, they also oversee that every transaction adheres to established standards and protocols.  

How a Credit Card Payment Works 

To better illustrate how all the above-mentioned key players work together to process a transaction, let's use an example that most can relate to: buying a coffee:

Firstly, the cardholder initiates the transaction by presenting their credit card to the merchant to pay for the coffee. The card contains essential information such as the cardholder's name, card number, expiry date, and a security code. The merchant, which in this case is the coffee shop, taps or swipes the card into a card reader.

Next, the acquirer comes into play. The acquirer securely receives the payment request from the merchant and forwards it to the appropriate card network. The card network forwards this to the issuer. The issuer then evaluates the transaction, verifying the card's validity, the cardholder's identity, and the availability of sufficient credit or funds to complete the purchase. Upon approval, a confirmation is sent back through the network, indicating the transaction is authorised. Once the issuer approves the authorisation, the authorisation is communicated to the card network, which then notifies the acquirer. Finally, the acquirer informs the merchant that they are now authorised to proceed with the sale.

At the end of the day or a specific settlement period, the merchant submits a batch of authorised transactions to the acquirer for settlement. This batch includes details of each transaction, such as the amounts, dates, and merchant identification.

The acquirer processes the settlement by sending the transaction information to the card network. The card network debits funds from the issuer and transfers funds to the acquirer. The acquirer then sends funds to the merchant. This transfer occurs electronically, ensuring a secure and quick transfer of funds. Finally, the card issuer, which is the financial institution that issued the credit card to the cardholder, records the transaction and updates the cardholder's account accordingly. The issuer sends a statement to the cardholder, outlining the details of the coffee purchase and any other transactions made during the billing cycle. The cardholder is responsible for repaying the issued credit within the given timeframe, either in full or through minimum payments along with any applicable interest charges.

Bottom Line

In summary, the credit card payment process involves the cardholder initiating the transaction, the merchant accepting the payment, the acquirer processing the payment request, the card network authorising and facilitating the transaction, and the card issuer settling the funds and updating the cardholder's account. These interactions ensure smooth and secure transactions between the various parties involved in buying a simple cup of coffee with a credit card. 

Behind the scenes of the quick "Approved" message for any credit card transactions, all these dynamics are hidden – an intricate but reliable ecosystem where technology and finance work harmoniously to streamline daily transactions.