Didyou know

We can describe the money flow process for credit card transactions by looking at when money changes hands across parties (Player View) or by looking at each stage in the process for every credit card sale (Step View).

The Player View provides a snapshot of the seven potential entities that can be involved in a credit card transaction: the consumer, merchant, issuer, acquirer, payment processor, gateway, and card association. This view shows how the players work with or represent each other. For example, the consumer obtains their credit card from an issuer and merchants process credit card payments with their acquirer, which they can connect to directly or through a gateway or payment processor.

The Step View details the individual stages of the money flow that take place for credit card transactions. This includes card authentication, authorization, authorization reversals, settlement, issuing credits (refunds), chargebacks and re-presentment. These stages of the money flow are detailed in subsequent pages of the fraud library.

 

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The Money Flow:Parties and Steps involved

With credit cards we introduce new complexities into processing an order:

Do you accept the card? With a cash transaction the merchant can immediately see if the currency the consumer is trying to use is a currency they accept. If you are in the United States and a consumer tries to make a purchase with Euros the merchant will tell them they don’t accept Euros. With credit cards, there are also a lot of different credit card types, and as a merchant you need to know which ones you can process. Your acquiring bank will only support a certain group of these cards, and you need to make sure you can process the card prior to accepting them from the consumer.


Is the card real?
 With cash, most people are very familiar with how it looks and feels. There are a number of things a merchant can do to see if the cash is counterfeit, but in general, everyone knows what a one dollar bill is. For credit cards, there are different brands, different logos, colors, and names on them. To make it even more difficult, banks and associations change these looks often. Likewise the credit card only has a set of numbers across the front of it — how do you know these numbers aren’t just gibberish?

Does the consumer have money available on the card? When you take cash you know immediately if the consumer has enough money to pay for the purchase. With credit cards, there is no “value remaining” indicator on the card. With credit cards a merchant has to go out and ask if the consumer has money remaining.

Is this consumer authorized to use this particular credit card? When a credit card is used, there is no magic check occurring on the names authorized to use the credit card. If the credit card says John Smith, how do you know this is really John Smith?

Have you delivered the goods or services? If not, you cannot ask for your money. This is because with credit cards there are rules about when you can request to have funds paid to you, and how you have to handle customer service complaints. With cash you can have consumers pre-pay for special orders, split shipments and delay shipments, but you cannot do these things with credit cards.

Now instead of a transaction occurring between a merchant and consumer, there can be up to seven entities (merchants, consumers, issuing banks, acquiring banks, payment processors, gateway services, card associations) involved in a transaction. As a merchant you have to rely on third parties to make sure the consumer can pay for the transaction, and to authenticate that the consumer is authorized to make the purchase.

Having so many more entities involved in a transaction means there are more steps a merchant has to go through to collect their money on a transaction.

 

The Player View

Payment Player Chart

1.       The consumer contacts an issuing bank and opens a credit card account. They are issued a credit card with a unique account number and a credit line (which is how much they are allowed to spend on the account).

2.       A consumer goes to a merchant and selects goods or services to be purchased. He or she provides the credit card information to pay for the transaction.

3.       The merchant takes the credit card information provided by the consumer and attempts to validate it through tests and checks and sends it to the acquiring bank to find out if the consumer has money available on the credit card to make the purchase. How the information is routed to the acquiring bank depends on the merchant’s decision to use a gateway service or payment processor. Remember a gateway service and payment processor operate as a middleman in the transaction giving value-added services to the merchant. The merchant could be using any of the following methods to get their credit card orders out to the acquiring bank:

a.  Directly connect to the acquiring bank

b.  Connecting to a payment processor that connects out to an acquiring bank

c.  Connecting to a gateway service that connects out to an acquiring bank

d. Connecting to a gateway service that connects out to a payment processor that connects to an acquiring bank

e.  Connecting to a payment processor that offers acquiring bank services directly

4.       The acquiring bank routes a request through the card association physical network to the issuing bank to see if funds are available on the consumer’s credit card.

5.       The issuing bank checks the consumer’s credit line and if funds are available they will set aside the amount of money that the order requires for payment. This money is “reserved” only — it has not changed hands, and is not the merchant’s money yet. At this point a reply is sent back through the card association network to the acquiring bank, then back to the merchant to let them know the status of the request for funds.

All of this has gone on, and all we have done is determine that the card is a valid credit card and that the consumer has enough money available on their credit card to make the purchase. There are seven major steps associated with processing a card-not-present credit card purchase. The previous graphic and example depict only the first two steps in that process. The merchant still hasn’t gotten paid for their goods or services. Additionally, the merchant has to worry about the “reserve” on their funds expiring, credits and potential bad transactions, called “charge-backs.”

The remainder of this section and subsequent pages will discuss each of these seven steps in more detail, but let’s take a brief look at the seven steps in processing a credit card transaction to get you familiar with the big picture.

 

The Step View

Step-View

In the Step View graphic I highlight two major areas in grey that represent two conceptual phases in the credit card process: pre-payment (1) and post payment (2). The pre-payment phase shows all of the steps that can happen on a consumer’s order before the merchant receives money from their credit card. The post-payment phase shows all of the steps that can happen on a consumer’s order after the merchant has received money.

Each of the steps (Card Authentication, Authorization, Authorization Reversal, Settlement, Credits, Chargebacks and Representment) are discussed on individual pages.

Remember not all seven steps will occur with every transaction. The Step View graphic provided a quick overview of the seven steps and the major objective of each step. Even with the data you will receive in the remainder of this section, make sure you work with your acquiring bank to get more detailed information on the policies and procedures they have in place for these steps.

AdditionalResources

  • introduction to ecommerce credit card payments.

    Covers the credit card process flow defining each of the "payment players"; reviews payment concepts such as authorizations, settlements, reversals, chargebacks and the credit card association's high risk programs.

  • EMV, chip & Pin is going around the u.s.

    Will the U.S. ever adopt EMV, or are banks and businesses holding out for the next wave of payment technology?

  • Fundamentals for Selecting ecommerce payment options

    The Fundamentals of eCommerce Payment Options online training course provides an introduction to the world of eCommerce payments. The course provides an overview of the main eCommerce payment options that exist today, why businesses use alternative payments, how eCommerce payment options are grouped, as well as providing examples, mind share, market share, and the major players.

  • Introduction to Credit Card Chargebacks.

    Covers the basic information about chargebacks everyone on a risk team needs to know from the manual review staff to the risk manager. Topics covered include basic definitions of chargebacks and other key terminology to the details of the representment process and evidence needed to dispute a chargeback. 

  • Introduction to Ecommerce Fraud Fundamentals.

    Provides participants foundation level knowledge about the theories, best practices and terminology surrounding electronic payment fraud. Presented in a standard format covering the history of eCommerce Fraud, consumer fraud, merchant fraud, fraudster motivation, fraud trends, identity verification and phishing.

  • Ecommerce Fraud Moving from Tools to Solutions.

    This session covers what constitutes a fraud solution and categorizes the many types of third party fraud tools. The course outlines the common terminology of fraud solutions and describes the capabilities needed to implement a fraud solution. 

Other STages of The Money Flow

 

Credit Card Payments

  • Credit Card Payments How important is it to take credit cards if you are doing business online; what can you expect from accepting credit cards online?
  • Understanding the Players In this section we will discuss each of the major players in terms of what their role is, which other players they associate with or represent and how they make money.
  • Credit Card Money Flow Learn how money is exchanged between the players within a credit card transaction.
  • Chargebacks and Fraud Liability
    In the card-not-present world the merchant is typically the one paying for the fraud. They already paid and lost the goods, all of the overhead costs they spent on the order, and they will still have to pay a charge-back fee.
  • Credit Card Payments 101 Get answers to common questions about deciding to take credit card payments online.
  • Are you overpaying for credit card processing? Don't be fooled by a really low rate, there is more to your "total cost" for credit card processing than just the rate. Dig under the covers, and negotiate on all the fees.

    The Fraud Practice