Payment Processing Credit/Debit Cards (Authorization, Clearing and Settlement Basics)

Summary

The video explains the basic flow of a credit- or debit-card payment, focusing mainly on credit cards. It distinguishes three stages—authorization, clearing, and settlement—and describes the roles of the banks and card networks involved.

Key participants

• Cardholder: The person using the card to make a purchase.
• Merchant: The seller accepting the card payment.
• Issuer: The bank or financial institution that issued the card. For a credit card, it assesses an applicant and sets a credit limit. During a purchase, it checks the transaction and decides whether to approve it.
• Acquirer: The merchant’s payment-processing provider. It supports the merchant’s payment acceptance and processes transactions between the merchant and the card network.
• Card network: A network that carries transaction information between the acquirer and issuer. The video names Visa, Mastercard, RuPay, Discover, and American Express.

The three stages of a card transaction

1. Authorization

   • The customer pays in person or online, and the merchant sends the transaction information to its acquirer.
   • The acquirer routes the request through the card network to the issuer.
   • The issuer checks matters such as whether the card is genuine and unblocked, whether the cardholder has available funds or credit, and whether the requested amount is within the credit limit.
   • The issuer approves or declines the request, and the response travels back through the network and acquirer to the merchant.
   • If approved, the amount is reserved or blocked on the cardholder’s account. The video emphasizes that authorization does not itself transfer the money to the merchant.

2. Clearing

   • The merchant sends transaction details to the acquirer, typically in a clearing file.
   • The transaction data is passed through the card network to the issuer so the parties can establish what amounts are owed.
   • Clearing is an exchange and reconciliation of transaction information; it is not the actual transfer of funds.
   • Transactions are handled in batches rather than as an immediate, individual payment.

3. Settlement

   • After clearing, the actual funds are transferred.
   • The video describes funds moving from the issuer, through a settlement bank, to the acquirer, which then credits the merchant’s account.
   • Settlement is generally performed in batches, with the net value of multiple cleared transactions exchanged.
   • The merchant therefore does not necessarily receive the money at the moment the customer makes the purchase.

Mastercard example

The video uses Mastercard’s description as an example of the same flow:

• A cardholder makes a purchase, and the authorization request travels from the merchant’s point-of-sale system through the acquirer and Mastercard network to the issuer.
• The issuer checks the card and available funds or credit, then returns an approval or decline.
• Mastercard’s clearing process is described as running in six cycles per day, with files containing transaction details and information such as currency conversion and exchange or service fees.
• During settlement, settlement information is provided and funds pass through a settlement bank before reaching the acquirer and merchant.

The video notes that fees are covered in a separate video but does not explain their amounts or calculation in detail.

Speakers and sources featured

• Narrator/instructor: Explains the card-payment process.
• Mastercard: Cited as the source of the example process and its description of clearing and settlement.