1. Presentment — a cardholder presents a card for payment
2. Authorization — the merchant acquirer sends a message across the network to the issuer processor to make sure there are enough funds to complete the transaction
3. Clearance — once authorized, the transaction is completed and information about the transaction is shared over the network between the merchant acquirer and the issuer processor
4. Settlement — at the end of the day, money is moved across the network from issuer to merchant
Example
1. A cardholder spends $100 at a restaurant where there is a 2.5% interchange rate
2. The merchant (restaurant) receives $97.50 which equals $100 less the $2.50 in interchange it owes the issuer; the merchant also pays a fee to its merchant acquirer and the network for processing the transaction
3. The issuer receives $2.50, recognized as interchange revenue; the issuer pays a fee to its issuer processor and the network for processing the transaction
4. The merchant acquirer receives a fee from the merchant for processing the transaction
5. The issuer processor receives a fee from the issuer for processing the transaction
6. The network receives a small fee from both the merchant and issuer for processing the transaction
Step 1: Your Customer Pays
Your customer has just made a purchase on your site using credit or debit. Hooray! The transaction begins its journey through your payment gateway.
Step 2: Encryption
When your customer's personal information and payment transaction data goes through the payment gateway, it's encoded to ensure secure transmission across the Internet.
Step 3: Authentication
The payment processor validates (aka "authenticates") that the payment data is being sent by its claimed source, as a way to curb fraud.
Step 4: Authorization
The payment processor requests the issuing bank to authorize a specific amount of funds from your customer's credit or debit card. The issuer checks to make sure the customer has enough credit to make the purchase and sends back an approval or decline. This entire process typically takes only a few seconds.
Step 5: Settlement
Settlement occurs when the card issuer sends the appropriate funds to your acquiring bank, which then deposits them into your merchant account. This can take a few days to complete.
Step 6: You're Paid
The funds are now accessible in your merchant account. But you may notice that some of the funds are not available, as most payment processors hold back a reserve temporarily to ensure you can take care of any liabilities, such as chargebacks or reversals.
Payments gateway: software that links your site’s shopping cart to the processing network.
Payments processor: software responsible for moving the transaction through the processing network, sending you a billing statement, working with your bank, etc
