Peering Into the Process of Credit, Debit Card Transactions
Each year, hundreds of millions of credit and debit cardholders make billions of transactions worth trillions of dollars. Yet few consumers are aware that such transactions travel through, and are made possible by, a highly evolved group of intermediaries who sign up merchants to accept cards, handle card transactions, manage the dispute-resolution process, and, with regulatory agencies, set rules that govern card transactions.
Delving into the process
In a recent article in the Atlanta Fed’s Economic Review, author Ramon DeGennaro demystifies the transaction process for credit and debit cards, dissecting the two major parts of the transaction: authorization and the process of clearing and settlement.
After describing a simple transaction with a private-label card, which is accepted by only one merchant, DeGennaro considers the more complex process involved with general-purpose cards such as Visa and MasterCard. He emphasizes the key roles of merchant acquirers, who sign up merchants to accept payment cards, and card processors.
The role of fraud assessed
DeGennaro also discusses the risk of fraud in the transaction process. He explains that while the risk is low for face-to-face transactions, it is far higher for business done by mail, telephone, or over the Internet.
Merchant acquirers bear most of the risk of loss if merchants fail to make good on transactions disputed by customers, the article states. To guard against such losses, acquirers carefully evaluate the credit quality of merchants seeking or using the acquirers’ services.
Finally, the article discusses some ways that merchant acquirers and merchants manage risk, especially the risk of fraud. For mail order, telephone, or Internet transactions, merchant acquirers have had to devise new ways to confirm that the purchaser is in physical possession of the card, and not just the card number, at the time of the sale. One solution is the three-digit numerical codes on the back of the card. Because this number is not embossed on the card, it does not appear on a paper sales slip, making it harder to steal. However, an ongoing challenge for merchants and merchant acquirers is developing new procedures for limiting risk.