Credit card processing is a complex business involving a large number of players, in spite of the fact that each transaction takes only a couple of seconds to process.  Below we review the key players and the process followed by a transaction under the four-party model, that is, the model used by Visa and MasterCard.  AmEx, Discover Card and Diners Club follow a three-party model.   

Key players 

1)  Buyer / Seller:  These are the two ends of the transaction.  The process will be similar whether buyer and seller interact directly at a bricks-and-mortar store, or via Internet, mobile, phone or post. 

2)  Payment gateway:  It is particularly relevant for interactions outside the retail store.  It connects the shopping cart - or similar S/W the retailer is running - with the payment processor in a safe and secure manner.  There are many different types of shopping cart S/W available, all of them with different APIs.  There are also a number of payment processors - albeit the number is much smaller - also with different APIs and connectivity requirements.  The payment gateway is the 'connector' between the store's front end and the processor.  A single gateway can offer a interface with many different shopping carts and processors, this allows the retailer to change either one without any impact on the rest of its business. 

Although this is the main purpose of the gateway, these companies often provide very relevant value-added services such as advanced fraud detection and customer information management among others. 

3)  Payment processor:  It safely and securely routes the payment transaction to the corresponding credit card network. 

From a merchant's perspective, other services that a payment processor can provide are:  fraud prevention and data security, support legislation and compliance, terminal deployment and maintenance and even full support in deployment and management of loyalty and closed-loop cards.   

Often the distinction is made between front-end processor and back-end processor.  Front-end processors have connections to various card associations and supply authorization and settlement services to the merchant banks’ merchants. Back-end processors accept settlements from front-end processors and, via The Federal Reserve Bank, move the money from the issuing bank to the merchant bank. 

4)  Credit card Interchange:  This is the credit card network run by Visa or Mastercard.  This interchange will route the payment request to the issuing bank and then liaise between the issuing and acquiring bank to settle the transaction. 

5)  Issuing bank:  The bank that issued the credit card to the buyer and that will need to authorize the transaction. 

6)  Acquiring bank:  In the setup that we depict below, it is the bank where the processor holds it merchant account, which is shared among all the merchants that do business with it.  This is the account where the funds the buyer is paying will be deposited for later collection.   

An alternative setup, which we discuss below, would be for the seller to establish a merchant account directly with the acquiring bank.  The main benefit of having the merchant account in the name of the processor instead of the retailer, is that the processor is often a large, well-known, reputable and publicly held company.  The risk the bank associates with this institution is often much lower than the risk it associates with a small retailer.  This, in turn, translates into a much smaller merchant account fee, a savings that can be passed on to the retailer. 

Process 

Please, play the movie below to review the steps involved in payment processing.

Other types of setup 

Not all players described in this process are always present.  For example:   

1)  Store directly connected to payment processor - No gateway:  The gateway is, at its core, a 'connector' between the retailer's front-end - for example, the shopping cart - and the processor.  If the retailer's front-end can connect to the processor directly and the retailer feel comfortable with this setup, it could bypass the gateway.  It is true that gateways do provide a number of important value-added services but it is also true that some of these services could be provided directly by the processor, not to mention that both processors and credit card companies have acquired gateways as of late. 

2)  Processor working directly with acquiring bank - White-labling of services:  Banks may want to act directly as payment processors for merchants but may not have the payment processing capabilities required.  In this case, an acquiring bank can partner up with a processor to white-label the services but still interact with retailers directly. 

3)  Acquiring bank performs its own payment processing:  Some of the larger banks do have payment processing capabilities in-house.  In this case, there is no processor - understood as independent third-party - involved. 

Costs associated with each step 

As one would expect, each company involved in the process is adding value and incurring costs that need to be covered, with a profit.  The fees per transaction - not including monthly, maintenance, authorization, chargebacks and other fees - will vary greatly.  For example, from a $100 transaction, the gateway, processor or interchange may only charge 10 cents while the issuing bank may charge $2 or the acquiring bank 75 cents.  All of these are sample values meant to indicate orders of magnitude.  Specific charges will vary based on company, location, setup...