Bank cards are one of the most important forms of payment these days. Therefore, having a basic understanding of how bank cards work, especially credit cards, will always come in handy. A credit card is different from your debit card. When you use your debit card, you use your own bank balance to make payments. But with a credit card, you use the issuer bank’s money to make payments. The total amount spent on the credit card has to be paid back by the end of the billing cycle. This is called credit card settlement.
What goes on in the backend when you request a credit card payment and how the settlement process works are a few questions we will answer in this article. We will look into the journey of you swiping your credit card at a shop to you getting the bill at the end of the month for that purchase. So, let’s get started!
Key players involved in the credit card settlement process
Before getting into the detailed process, let’s understand the key players involved in the process.
As the name suggests, the cardholder is the individual who has the credit card and uses it to make payments. The cardholder gets the credit card from a credit card issuing bank.
A merchant in this case is any business which sells goods or services and has a merchant account to accept payments from the customer by credit or debit card.
Issuing Bank or cardholder’s bank is the bank which has issued the credit card to the customer. The issuing bank is the one which sends you credit card bills every month.
The acquiring bank is the merchant’s bank. These banks provide the merchants with a merchant account which accepts credit card or debit card payments. It also provides the merchant with both hardware and software to accept card payments.
Moreover, the acquiring bank deposits money from the credit card sales. We will discuss further on this.
Visa and Mastercard card associations
Both Visa and Mastercard don’t issue cards or neither offer a bank account. They are the link between issuing and acquiring banks.
When you make a payment using your credit/debit card, the data is transmitted using these card associations network, depending on which card you have.
Visa uses Visanet and Mastercard used Banknet to transmit data.
Now that you are aware of the players, let’s understand how the settlement process works. It is actually a 2-step process including Authorization and then Clearing and Settlement.
Credit card Authorization process: The first step of the credit card settlement process
Below are the steps involved:
|The cardholder presents the card for payment to the merchant and furnish all relevant details for the same.||Cardholder and Merchant|
|The merchant accepts the card using their credit card machine, payment gateway or a software to send these details (cardholder info and transaction amount) to their acquiring bank.||Merchant and Acquiring Bank|
|The Acquiring or merchant’s bank gets all the information and uses the card association’s network to transmit this info to the issuing bank.||Acquiring Bank, Card associations, Issuing Bank|
|Once the details reach the issuing bank, it is on the issuing bank to approve or decline the transaction. The response depends on validity of the transaction amount, credit card limit and balance, and status of the account.
The issuing bank again uses appropriate card association to send its response back to the acquiring bank.
|Issuing Bank, Acquiring Bank|
|The response code reaches the merchant and is put in batch awaiting settlement.||Merchant|
|As a cardholder, your journey is over here.|
Once the authorization process is over, the real backend process of clearing and credit card settlement process starts.
|Merchants batch together all the approved credit card transaction and send to their acquiring bank at the end of the day.||Merchant and Acquiring bank|
|The Acquiring bank then sends these batches to the issuing bank using the card network (Visanet or Banknet).
It also deposits the funds in the merchant account from the credit card sales, after deducting its processing fee.
|Acquiring bank and Card associations network|
|The card network credits the acquiring bank with the authorized transaction amount and debits the issuing bank with the same, less interchange and network fees.||The card networks, issuing bank, and Acquiring bank|
|The issuing bank pays for its cardholder purchases to the acquiring bank.||Issuing Bank and Acquiring Bank|
|Then, as a cardholder, you will have to repay the total bill to your issuing bank. Basically, paying the credit card bill every month.||Cardholder and Issuing Bank|
Once you as a cardholder pay your credit card bill, the settlement process is finally complete.
Now that you are clear with the whole authorization and credit card settlement process, pick up your phone or laptop, and don’t forget to pay your credit card bill for this month! You can make online payment for the same using the credit card bank’s website or their app.