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Electronic banking

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It’s Saturday morning and you’re at the checkout of the local supermarket. You scan your goods for a total of $137. You then tap your card on the EFTPOS terminal and leave the store. You don’t think twice about how the $137 will get from your account to the store’s account - it just magically happens.

Of course, it’s not magic but a sophisticated network of computers working together to “switch” your transaction. So, how does a credit or debit card transaction actually get processed behind the scenes? The first thing we need to understand is the identity of the five main actors in a given transaction.

  • The cardholder – the customer (aka YOU).
  • The merchant – the store/business you are purchasing from.
  • The acquirer – the bank that processes payments for the merchant.
  • The issuer – the financial institution that issued your card.
  • The card schemes – the brands such as Visa and Mastercard.

Let’s use an everyday example to show how each player is involved in the different stages of the authorisation process.

  • Peter uses his Visa Card to buy a shirt from Brian’s Menswear (merchant).
  • Brian’s store sends an authorisation request to its bank (acquirer).
  • The acquirer receives the request and sends it to Visa Card.
  • Visa Card forwards the request to the issuer - the bank whose name appears on Peter’s Visa Card.
  • The issuing bank checks that Peter’s account has sufficient funds and sends an authorisation code back to Visa Card.
  • The issuing bank also puts a hold on Peter’s account for the purchase amount.
  • Visa Card sends the authorisation back to the acquirer.
  • The acquirer, in turn, on-forwards the authorisation to the merchant.
  • Brian hands Peter his shirt.

The authorisation process is super quick – it typically takes less than three seconds. Just to put that into perspective, it would have taken you about 15 times longer to read how this process works than the time it takes for it to happen!

When you swipe your card at a merchant, you’re done with the transaction instantly. But the transaction often appears as pending on your account and will stay that way until the payment is fully processed and transferred to the merchant as part of the settlement process.

For Brian – our menswear shop owner – to receive the funds, his bank (the acquirer) must send Peter’s bank (the issuer) a request for payment. After receiving the payment request, Peter’s bank charges his account and then settles to Visa Card which, in turn, settles with Brian’s bank which, in turn again, deposits the funds into Brian’s account.

When standing at the checkout counter, the card transaction process seems deceptively simple. Yet behind every swipe or tap of a customer’s card is an incredibly complex set of cogs and gears. This machinery works together to coordinate the seamless payment experience that consumers enjoy.

Visa and Mastercard are the largest payment processing platforms in the world. They serve as mediators between issuing and acquiring banks in authorising credit and debit card transactions. Exact numbers are hard to come by, but both Visa and Mastercard each have around 40 million merchants.

In 2017, according to the Nilson Report, Visa processed 147.9 billion transactions, almost double that of rival Mastercard at 75.8 billion. In terms of value, the transactions processed – just in the USA – by Visa in 2017 were worth a staggering $3.3 trillion with Mastercard coming in at $1.3 trillion.

The card networks that transport the data that ferry billions of transactions between merchants, processors and banks are modern marvels. The payments ecosystem continues to evolve, and some believe that smartphone payments will eventually replace card payments.

My bet is that card payments will be around for a long time yet. As always, I believe that the futurists are ahead of themselves in suggesting that cards will shortly go the way of the phone booth. Research shows that many consumers remain happy to swipe their plastic rather than tap their mobile.

Like cash – which is still used globally for over 75 per cent of consumer payments – credit and debit cards are not facing an imminent demise. The expiry date for plastic cards is a long way off!

Paul J. Thomas, CEO


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CEO Paul Thomas