Payments Transactions Explained

Summary

This presentation outlines the payment process, detailing the roles of the customer, merchant, acquirer bank, card network, and issuing bank. It explains the steps from a purchase to transaction authorization and settlement, emphasizing the importance of the interchange fee, processing fee, and acquirer fee. The Merchant Discount Rate (MDR), which sums these fees, is highlighted, with a focus on efforts to reduce MDR in growing markets like India to encourage digital payments.

Takeaways

• 🛒 The customer initiates the payment process by making a purchase at a shop.
• 🏪 The shop uses a point of sale (POS) device provided by an acquirer bank to process payments.
• 🏦 The acquirer bank is responsible for the POS terminal and assists in streamlining payment challenges.
• 🔄 The card network, such as Visa or Mastercard, acts as the payment processors and the integration backbone between banks.
• 💳 The issuing bank is the one that issues the card used by the customer for the transaction.
• 🔐 The authorization process involves the POS device sending transaction data to the acquiring bank for validation.
• 📊 The acquiring bank checks the validity of the card and the customer's available funds or credit limit before proceeding.
• ✅ Upon successful authentication, the issuing bank approves the transaction, which is then communicated back to the merchant.
• 📑 The merchant receives a printout indicating the success or failure of the transaction from the acquiring bank.
• 💵 The final step in the payment process is the settlement, where the acquiring bank transfers the funds to the merchant.
• 💲 Various fees are involved in the transaction, including interchange fees, processing fees, and acquirer fees, which make up the Merchant Discount Rate (MDR).

Q & A

What is the role of the customer in the payment flow?

The customer initiates the payment process by making a purchase and using a debit or credit card at the point of sale device.

What is a point of sale (POS) device and who provides it?

A point of sale device is the terminal used to process card payments at a merchant's location. It is provided by an acquirer bank, which is responsible for its installation and maintenance.

What is the function of an acquirer bank in the payment process?

The acquirer bank is responsible for placing the POS terminal at the merchant's location and facilitating the transaction by sending the transaction data to the customer's issuing bank for authorization.

What is the role of a card network in the payment transaction?

A card network, such as Visa or Mastercard, acts as the backbone for the integration between the acquiring bank and the issuing bank, ensuring the transaction data is transmitted securely.

What is an issuing bank and how does it relate to the customer?

The issuing bank is the financial institution that has issued the card to the customer. It authenticates the transaction, checks the validity of the card, and verifies that the customer has sufficient funds or credit limit for the transaction.

What happens when a customer swipes their card at the POS terminal?

When a customer swipes their card, the POS terminal sends the transaction data to the acquiring bank, which then forwards it to the issuing bank for authorization.

What is the purpose of the authorization step in the payment process?

The authorization step ensures that the card being used is valid, not hot-listed, and that the customer has the necessary funds or credit limit to complete the transaction.

What is the difference between a debit card and a credit card in terms of transaction validation?

For a debit card, the issuing bank checks if there are sufficient funds in the account, while for a credit card, it verifies that the transaction is within the customer's credit limit.

What is the final step in the payment process after the transaction is authorized?

The final step is the settlement, where the acquiring bank completes the financial transaction by transferring the funds to the merchant.

What is an interchange fee and who charges it?

An interchange fee is a premium fee charged by the issuing bank for maintaining the card, authorizing transactions, and managing the customer's account. It is typically the highest fee in the payment process.

What is the Merchant Discount Rate (MDR) and how is it determined?

The Merchant Discount Rate (MDR) is the sum of all fees charged in a payment transaction, including interchange fee, processing fee, and acquirer fee. It typically ranges from one to three percent of the transaction amount.