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.

Outlines

00:00

💳 Understanding the Payment Flow Process

The first paragraph introduces the topic of payment flow, explaining the roles of various parties involved in a successful transaction. The customer initiates the process by making a purchase with a card at a point of sale (POS) device provided by an acquirer bank. This bank is responsible for the installation and management of the POS terminal. The card network, such as Visa or Mastercard, acts as the integration backbone between different banks. The issuing bank, which issued the customer's card, authenticates the transaction based on the card's validity and available funds or credit limit. The process involves authorization, validation, and settlement steps, with the acquirer bank notifying the merchant of the transaction's outcome and completing the settlement.

05:01

💰 Fees Associated with Payment Transactions

The second paragraph delves into the fees involved in payment transactions. It highlights the interchange fee, which is the most significant fee charged by the issuing bank for maintaining the customer's account and authorizing transactions. The interchange fee is approximately 1.81% for credit cards and 0.3% for debit cards. Additionally, payment processors like Visa and Mastercard charge a processing or switching fee, which ranges from 0.15% to 1%. The Indian government is working to reduce or eliminate this fee for domestic RuPay cards to promote their use. Acquirer banks also charge a fee for their services, which can be between 0.5% to 1%. The merchant discount rate (MDR) is the cumulative sum of all these fees, typically ranging from 1% to 3%. The paragraph concludes by discussing the impact of MDR on merchants and the preference for cash or alternative payment methods like UPI in markets with high MDRs.

Keywords

💡Payment Flow

Payment flow refers to the sequence of steps and interactions between different parties involved in processing a payment transaction. In the video, the payment flow is the central theme, illustrating how a customer's purchase is facilitated through a series of steps involving various parties such as the customer, shop, acquirer bank, card network, and issuing bank.

💡Point of Sale (POS)

A Point of Sale (POS) is a location where a retail transaction is processed. The script mentions the POS device as the tool used by the shop to accept payments from customers. The acquirer bank provides this device, which is crucial for initiating the payment transaction process.

💡Acquirer Bank

The Acquirer Bank is the financial institution that installs the POS terminal at the merchant's location and is responsible for processing the payment. In the script, the acquirer bank plays a key role in receiving transaction data from the POS and forwarding it to the issuing bank for authorization.

💡Card Network

Card networks, such as Visa, Mastercard, and RuPay, are the entities that facilitate the communication and transaction processing between different banks. The script describes them as the backbone that integrates between the acquirer bank and the issuing bank, ensuring the transaction can proceed smoothly.

💡Issuing Bank

The Issuing Bank is the institution that issues the card to the customer and is responsible for validating the transaction. The script explains that this bank checks the card's validity, the customer's available balance or credit limit, and either approves or declines the transaction based on these checks.

💡Authorization

Authorization is the process where the issuing bank confirms that the transaction can proceed based on the validity of the card and sufficient funds or credit limit. In the script, authorization is a critical step where the issuing bank validates the transaction data received from the acquirer bank.

💡Settlement

Settlement refers to the final stage of the payment process where the funds are transferred from the customer's bank to the merchant's account. The script mentions settlement as the last step, ensuring that the merchant receives the payment for the goods or services provided.

💡Interchange Fee

Interchange Fee is a fee charged by the issuing bank for the services provided in processing the transaction. The script highlights this as the most significant fee in the payment process, with different rates for credit and debit cards, and is a key component of the merchant discount rate.

💡Merchant Discount Rate (MDR)

Merchant Discount Rate (MDR) is the total cost borne by the merchant for accepting card payments, which includes interchange fees, processing fees, and other charges. The script explains MDR as the sum of all fees charged in the payment process, typically ranging from 1% to 3%.

💡UPI

Unified Payments Interface (UPI) is a payment system in India that allows users to make instant interbank transactions using a mobile platform. The script mentions UPI as an alternative payment method that has a lower MDR or is being promoted by the government to reduce transaction costs for merchants.

💡Switching Fee

Switching Fee, also known as processing fee, is charged by card networks for facilitating the transaction between the acquirer and issuing banks. The script notes that the Indian government is working to reduce or eliminate this fee to promote the use of domestic cards like RuPay.

Highlights

The presentation describes the payment flow and the collaboration between different parties involved in a successful payment.

The customer is the first party in the payment process, making a purchase using a debit or credit card.

The shop, equipped with a point of sale device provided by an acquirer bank, is the second party in the transaction.

The acquirer bank is responsible for installing the point of sale terminal and streamlining payment challenges.

Card networks, such as Visa and Mastercard, act as payment processors and integrate between different banks.

The issuing bank, which issued the customer's card, validates the transaction based on the cardholder's account status.

The authorization process involves the point of sale device sending transaction data to the acquiring bank.

The acquiring bank checks the validity of the card and the available funds or credit limit before authorizing the transaction.

The issuing bank authenticates the transaction and communicates the result back to the acquiring bank.

The acquiring bank notifies the merchant of the transaction's authorization or decline.

The merchant receives a printout indicating the success or failure of the transaction.

Settlement is the final step where the acquiring bank processes the payment to the merchant.

Interchange fees are the highest fees charged by the issuing bank for maintaining the card and authorizing transactions.

Payment processors charge a processing or switching fee, which can vary between 0.15% to 1%.

The Indian government is working to reduce or eliminate the processing fee for domestic card transactions.

Acquirer banks also charge a fee for their services, which can range from 0.5% to 1%.

Merchant Discount Rate (MDR) is the sum of all fees charged in a transaction, typically between 1% to 3%.

In growing markets like India, merchants may prefer cash or UPI payments due to lower MDR.

Transcripts

in in the current presentation

uh today's presentation let's quickly go

through how the payment flow works

what are the various parties which are

involved how they collaborate

uh and leverage each other to make a

successful payment

so let's go straight to the topic

describing the flows let's quickly go

through the main parties which are

involved

so the first party here is the customer

who is making a purchase

so the customer who is making a purchase

is the first party

we have the shop the shop is

the one where he is purchasing the stuff

and

where he has to make the payment and the

shop is the one

which has which is using a point of sale

device for making the payments

so this point of sale device is

basically

given by somebody which is known as a

acquirer bank

or acquiring bank so the bank

which has installed the point of sale

terminal at the merchant location

so this acquirer is the bank which has

basically placed this uh

this device and which is which is

helping you

uh iron out different challenges which

are there in payment in a very stream

streamlined and uh abstracted way and

then we have another party which is the

card network

payment pros also called as the payment

processors these are rupe

visa cards mastercards different cards

which are there

and these are basically the backbone of

having the integration between bank a

and bank b

and then the final thing is the issuing

bank so this issuing bank is the bank

who has

issued the card which the customer is

going to use so that's why it is also

called as a issuing card because it is

the one which has issued the card

so let's see the number one the first

step is here

here what is happening is the customer

has purchased some goods

and he or she is using a debit card or a

credit card to make the payments

so he purchases he chooses groceries he

swipes his card here swipes tabs

rf rfid nfc base

contactless card anything he does he

does it on the point of sale device

from there what is happening is that the

this terminal is going to send the

transaction data to the acquiring bank

so this is basically the authorization

part where this

message is being sent here

so the acquiring bank is going to

receive this message

and it is going to send it so it has to

because

it has to say see that whether this

issuers card is valid it has the valid

amount i mean

i it is valid for transactions it is not

hot listed at all

so for all those things it has to send

the data here so it is

sending that data here so basically this

transaction three

three and it happens on the backbone of

the payment processor it is basically

the same transaction which is going here

not two transactions on the backbone of

this it is going

so the acquiring bank is sending the

transaction data to the customers

the consumers issuing bank and it is

leveraging this card network

so it is sent it there and this

issuing bank once it receives this data

it is going to authenticate

so this issuing bank is going to

authenticate the data that whatever it

has received is correct or not

validate valid wallet card holder

based on the successful authentication

and also based on

the limit so for example if it's a debit

card whether the money is there in the

account or it is a credit card then the

credit limit is valid

so those checks it will make and based

on those checks it will

it will either validate the transaction

or it is going to decline the

transaction

and that result is going to come to the

acquiring bank

acquiring bank and the acquiring bank

notifies

the merchant which is the step number

five

so in the step number five we are saying

that the acquiring bank has notified the

merchant that the transaction has

been authorized or declined okay and

then uh

based on whatever is the status you get

a print out here

so this printout is coming based on uh

the step number five so based on the

output of step five you get a print out

here

indicating success or failure of the

transaction

and the last step which is indicated

here is the number six

is basically the settlement so from uh

from the acquiring bank

the settlement should be done to the

merchant so that settlement is the

last step here so this is

on a very high level how uh the

what are the different parties involved

and how these financial

payment transactions work when you when

you swipe your card

on a point of sale device in a grocery

shop or anywhere else

now let's see uh uh now now see

we are leveraging all these parties so

they must be

charging some fee so that fee

is right

so what we see here is the different

kind of fees which are

levied so this is the most important fee

and

mostly this is the highest fee which is

there this is called the interchange fee

so this issuing bank is issuing the card

it is maintaining the card it is

basically holding the account of this

customer and whatever data comes this

issuing bank is responsible for

authorizing denying

maintaining the balance all those things

so for this

reason issuing bank charges are

a premium and that is basically a fee

and it is called an interchange fee

and we are seeing these numbers here

they may be

here there but roughly they may be they

may be correct and accurate so one point

eight one percent

uh credit card and point three percent

for debit cards

then these processors so for example

this visa

mastercard these these are going to

charge you

uh the the processing fee

also called as widely called as

switching fee

and this switching fee is basically from

point one five percent to one percent

and indian government is working towards

making for rupe

this processing fee to be zero

and that's why indian government is

trying to push this rupe rupe is a

basically domestic card from india

and it is now they are trying to extend

it to international also

international level also and there the

switching fee

is planned to be zero but most of these

processors are basically

some organizations profit making

organization so you will see the

switching fee between point one five

percent to one percent

and then there is a fee which this bank

also because this is also helping this

is also party in this transaction

so it also charges some fee point five

percent to one percent fee uh

so so like i said interchange fee is the

highest

and then this could be the second and

this is the acquirer fee is

generally it is the minimum because they

charge some other fees also from the

merchant like

the yearly maintenance of the point of

sale or some other fees

so now we we have one very important

term called merchant discount rate

so all these fees which is being charged

uh

is is basically called the mdr and it is

the sum of all the fees which is getting

charged

uh and it is around one to three percent

so so that's uh that's the

mdr and uh so so so that's why you may

have

noticed especially in growing markets

like india that the

merchant asks you uh to probably pay in

cash

uh or pay by upi upi is again

a payment methodology in india unified

payment

so uh so so wherein this mdr

is very less or government is trying to

make it

zero uh so that's about

the payment i hope this is little clear

to you now

thanks for watching thank you