This is a “cheat sheet” I frequently refer back to on the card payment authorization and transaction settlement process in the US.

Below outline key players and what a credit or debit transaction looks like.

Note: This is pretty high level and much of the info was found on Stripe’s and Square’s blog post. They are great, go check them out for more in depth info!

Key Players:

Cardholder: The customer who initiates the purchase using a credit or debit card.

Merchant: Any business that sells goods or services.

Issuer: A financial institution that gives—or issues—credit and debit cards to cardholders. While some credit card networks supply cards directly, it’s much more common for issuers to act as their intermediaries, distributing cards to cardholders and managing the accounts associated with those cards.

Acquirer: The acquirer partners with businesses to process credit and debit card transactions and is responsible for establishing and maintaining merchant accounts; facilitating the authorization and settlement of transactions with issuing banks; and assuming the risk of chargebacks, fraud, and disputes.

Gateway: Payment gateways act as conduits, passing credit card transaction information from the merchant to the relevant banks via the appropriate credit card network through one of the following mechanisms:

• Credit card terminals in brick-and-mortar stores (think of this as a physical payment gateway)

• Payment services and APIs for websites and mobile applications (think of this as a virtual payment gateway)

Processor: Act as intermediaries between businesses and card issuers. They move key information about a transaction between all parties—business, card network, issuer—to get payments authorized and settled. They verify the transaction details, check the availability of funds, and securely transfer funds between customer and merchant accounts.

While the payment processor and merchant acquirer are historically separate entities, some businesses work with payment providers that offer both functions, such as Stripe.

Network: Card networks authorize and process credit card transactions, as well as settle the terms for transactions and move payments between customers, businesses, and their banks. In the US, the major card networks are Visa, Mastercard, American Express, and Discover.

Card Payment Process

Authorization:

1. Purchase: 

The customer submits a credit or debit card for payment, either online or in person.

2. Routing:

For in-person transactions, the merchant’s card reader and point-of-sale (POS) accepts the card information and relays it to the merchant’s payment processing provider.

For online transactions, the process is similar., except there is no card reader—so the customer either manually inputs their card information, uses a digital wallet to pay with a stored credit or debit card, or uses a card on file with the merchant.

3. Request: 

The merchant’s payment processor (Stripe, for example) sends an approval request to the card issuer via the card network.

4. Verification:

The card issuer checks to verify three things related to the transaction:

• The card itself is valid.

• The cardholder’s identity is verified, typically by matching the billing address provided during checkout to the address on file for the card.

• There are sufficient funds or credit available to cover the amount being requested for approval.

5. Confirmation: 

The issuing bank approves (or rejects) the transaction and sends this information back through the credit card network to the merchant bank and the payment gateway.

6. Approval:

If the transaction is approved, the issuer will immediately reduce the balance or available credit on the account associated with the card, even though the funds won’t be transferred to the business right away. Customers see this as a “pending” transaction on their credit card statement.

Settlement:

1. Transfer:

During settlement, the issuing bank transfers funds through the card network directly to the merchant account.

2. Chargebacks:

The final key role that issuers play concerns chargebacks. A chargeback is a reversal of funds following a debit or credit card purchase, prompted by the customer filing a dispute over the charge. The card’s issuer receives and processes the request and ultimately decides whether or not to grant the funds’ reversal. If the merchant decides to fight the chargeback, they can reach out directly to the customer who contested the charge, but often the merchant will deal with the issuer to resolve the matter.