Payment cards are one of the revolutionized ideas in digital payment. It had made the payment process a lot simpler. As in the before age, the Barter system was used, in which goods are exchanged with other goods for trading. But later due to the difficulty in trading with the Barter system, another medium (gold) was introduced. Thus people used the gold to buy and sell goods between them.
But due to the difficulty in transporting the gold for international trading, banks asked the people to deposit their gold in them and get an “IOU”(I owe you)-a promissory note, as a proof of deposit. So whoever holds that receipt, can claim that gold in that locker. Thus trading happened between the merchants via the promissory notes alone. Till 1971, those promissory notes were backed up by gold. But after 1971, the gold standard was removed and the promissory note was made to stand alone, which we today call today it as fiat money.
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| Fiat money |
When technology entered, this fiat money was converted digitally and was called as digital fiat money. This system helped people to transact money without even touching it. Also, this system offered a faster and more secure platform than trading with physical money. As digital money gained popularity among people, several modes of payment were introduced in the payment process. Generally, payments are classified as Large Value Payment systems and Retail Value Payment Systems. In our before topic, we learned about, both types of payments. Here retail payments gained more popularity among the people as it used for shopping, paying bills, etc. There are several categories of retail payments, among which, the card payment is one of the most attractive and feasible ones for everyone.
Payment cards are rectangular plastic piece which has some sensitive numbers on them. These cards will be directly linked to our bank account. By using this card we can easily transact the amount online, without even going to the bank and withdrawing the money. These cards were used in different places like Point of Sale (PoS), online, and ATMs. In this article, we will look at the card transaction process taking place in PoS machines and online.
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| Payment Cards |
Working of Card payments
The card payment is somewhat an intricate process, as so many parties are involved in. All these parties make up the transaction in a hassle-free and in a secure way. The main parties included in the transaction are,
Customer (goods buyer)
Merchant (goods seller)
Payment Service Provider (E.g.
Euronet, BillDesk, emerchantpay)
Card Company (VISA,
MasterCard, RuPay)
Issuing bank (Home bank for
the customer)
Acquiring Bank (Home bank
for the merchant)
. One of the important parties in the transaction is the payment service provider. This provider provides the gateway and the processor services. Thus all these parties, transfer the financial details and makes the card transaction in three steps, namely,
Authorization
Clearing and,
Settlement
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| Card inserted in a PoS machine |
The payment processor performs two kinds of operation. One is the front-end operation and the other one is the back-end operation. In the front-end operation, the encrypted details from the payment gateway are given out to the respective card network (VISA, MASTERCARD, RuPay, etc.). These card networks get the account details and the fund balance information, by routing the information to the issuer bank. The issuer bank then puts a hold on the money to be paid and sends an approval to the card company. (Money is just on hold, and the actual movement of money will take place only at the end of the day- Total Payment) The card company then routes the information from the issuer bank to the payment processor, which is then forwarded to the payment gateway and to the PoS terminal. When the terminal receives the response, a bill is generated at the terminal, which tells the merchant, that the money will be credited to his account very soon, by removing the hold on the issuer’s bank. This indicates the completion of the authorization step.
The next step is clearing. In this step, the merchant will create all the payment that needs to be made on that day as a batch file. This batch file is then forwarded to the merchant’s bank via the service provider. Upon receiving, the merchant’s bank will again create a batch file from all the merchants and forwards it to the card company, which then puts a consolidated batch file and sends it to the issuer, who should give the money for the day. At last through the settlement process, the payment from the issuer bank routes through the card company and to the payment processor. Now by getting the information from the front-end processor, the back-end processor routes the payment to the different merchant banks. The merchant bank then credits the merchant account finally.
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| Card Payment process |
As sensitive card details are stored in the online merchant server, a single error in the system could lead to a massive impact on the customer. Thus nowadays, many online platforms have implemented the tokenization process, as per the central bank rule. This process enables card details to be secured, by storing the card details with an alternate number called the token. This is how the transaction will happen on payment cards. To see more categories of retail payments, please visit the following article,
https://sciencetopic03.blogspot.com/2022/08/types-of-retail-payment-system.html
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