Introductory look at how payments works specifically with credit and debit cards.

1. Credit/Debit Card Primer
Understanding how payment works
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2. Overview
Credit Card Primer
This document provides a graphical overview in the seven major steps involved in a
credit card transaction. The basis is to educate how payment systems work, specifically
credit /debit cards. This understanding can lead to an overall basis for most other types
of payments ranging from Paypal to mobile and other forms.
Online ecommerce/retail commerce is a process enabling secure credit card payments
for goods and services over the Internet. The acceptance of payment is the most crucial
part in any forms of business and online commerce is no exception. Therefore the
payment engine is the key component of monetization from your users (in the case of
mobile app stores, this is provided via the Google Play and iTunes mechanisms). The
payment engine receives the payment data and processes the credit card transaction
through encryption of the information and then passes it across the Internet to a
payment gateway, where it is decrypted and routed to the existing credit card
infrastructure for authorization and settlement. This document will help you to quickly
familiarize yourself with processes used to securely handle and verify transaction
payments for the following types of transaction payments:
• In site/app Quick Sale Transactions (Services and Items Based, items, incremental)
• Recurring Transactions (Monthly Subscriptions)
This document provides a graphical overview in the seven major steps involved in a
credit card transaction. The basis is to educate how payment systems work, specifically
credit /debit cards. This understanding can lead to an overall basis for most other types
of payments ranging from Paypal to mobile and other forms.
Online ecommerce/retail commerce is a process enabling secure credit card payments
for goods and services over the Internet. The acceptance of payment is the most crucial
part in any forms of business and online commerce is no exception. Therefore the
payment engine is the key component of monetization from your users (in the case of
mobile app stores, this is provided via the Google Play and iTunes mechanisms). The
payment engine receives the payment data and processes the credit card transaction
through encryption of the information and then passes it across the Internet to a
payment gateway, where it is decrypted and routed to the existing credit card
infrastructure for authorization and settlement. This document will help you to quickly
familiarize yourself with processes used to securely handle and verify transaction
payments for the following types of transaction payments:
• In site/app Quick Sale Transactions (Services and Items Based, items, incremental)
• Recurring Transactions (Monthly Subscriptions)
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3. Entities involved in a Payment
Credit Card Primer
1. Customer – the purchaser
2. Merchant – you the company or vendor
3. Merchant’s Bank – a merchant bank (acquiring bank that accepts
credit cards on behalf of the vendor). Ex: Bankcard Services, Inc.
Can be another company that specializes in managing credit
account details.
4. Payment Gateway –is a secure (Internet) bridge between
merchant businesses and the credit card and electronic check
payment processing networks. Ex: Authorize.net
5. Credit Card Issuer – the customer’s Issuing Bank that issued the
credit card (Visa, MC, Amex, Discover, etc.)
1. Customer – the purchaser
2. Merchant – you the company or vendor
3. Merchant’s Bank – a merchant bank (acquiring bank that accepts
credit cards on behalf of the vendor). Ex: Bankcard Services, Inc.
Can be another company that specializes in managing credit
account details.
4. Payment Gateway –is a secure (Internet) bridge between
merchant businesses and the credit card and electronic check
payment processing networks. Ex: Authorize.net
5. Credit Card Issuer – the customer’s Issuing Bank that issued the
credit card (Visa, MC, Amex, Discover, etc.)
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4. 7 Steps
Credit Card Primer
Explained in about 7-10 steps, here is an overview of the credit or
debit process.
1. Initiate Transaction
2. Route Transaction
3. Submit
4. Validate
5. Review
6. Process
7. Complete
Explained in about 7-10 steps, here is an overview of the credit or
debit process.
1. Initiate Transaction
2. Route Transaction
3. Submit
4. Validate
5. Review
6. Process
7. Complete
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5. Step 1: Initiate Transaction
Credit Card Primer
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6. Step 1: Initiate Transaction
Credit Card Primer
Customer submits a credit card transaction to the Authorize.Net
Payment Gateway on behalf of a customer via secure connections
from a Web/Online/Mobile site.
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7. Step 2: Route Transaction
Credit Card Primer
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8. Step 2: Route Transaction
Credit Card Primer
Authorize.Net receives the secure transaction information and
passes it via a secure connection to the Merchant Bank’s Processor.
This processor is usually an entity that does business with the
Merchant Bank.
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9. Step 3: Submit Transaction
Credit Card Primer
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10. Step 3: Submit Transaction
Credit Card Primer
The Merchant Bank’s Processor submits the transaction to the
Credit Card Interchange (a network of financial entities that
communicate to manage the processing, clearing, and settlement of
credit card transactions).
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11. Step 4: Validate Transaction
Credit Card Primer
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12. Step 4: Validate Transaction
Credit Card Primer
The Credit Card Interchange routes the transaction to the
customer’s Credit Card Issuer and back to the processor.
The Credit Card Issuer approves or declines the transaction based
on the customer’s available funds and passes the transaction
results, and if approved, the appropriate funds, back through the
Credit Card Interchange
Then the Merchant Bank’s Processor relays the transaction results
to Authorize.Net.
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The Credit Card Interchange routes the transaction to the
customer’s Credit Card Issuer and back to the processor.
The Credit Card Issuer approves or declines the transaction based
on the customer’s available funds and passes the transaction
results, and if approved, the appropriate funds, back through the
Credit Card Interchange
Then the Merchant Bank’s Processor relays the transaction results
to Authorize.Net.

13. Step 5: Review Transaction
Credit Card Primer
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14. Step 5: Review Transaction
Credit Card Primer
Authorize.Net stores the transaction results and sends them to the
customer and/or the merchant. The entire communication process
thus far is usually three seconds or less (longer times occur due to
internet connectivity and routing of signals).
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15. Step 6: Process Transaction
Credit Card Primer
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16. Step 6: Process Transaction
Credit Card Primer
The merchant delivers the services or goods accordingly. Normally,
this is where the transaction ends from the customer perspective.
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17. Credit Card Primer
Step 7: Complete Transaction
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18. Step 7: Complete Transaction
Credit Card Primer
At this point, the Credit Card Interchange passes the appropriate
funds for the transaction to the Merchant’s Bank, which then
deposits funds into the merchant’s bank account which may take a
few days to post. On the consumer end, this is when pending
transactions occur before being posted to their statement.
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19. Another overall illustration
Another Overview
This is another full circle diagram showing the various steps and
entities involved in a credit or debit transaction.
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20. What to consider next
Next Steps
Many vendors exist to provide these services in one or many
countries, eliminating the need to do it yourself. There are many
vendors, and factors to look for include:
a) per transaction fee b) commission fee c) fraud / enhanced rates
Fraud matters are a big concern, and still keep in mind, you the
merchant, are liable for fraud. However, this is being mitigated and
the vendors offer services that try to minimize this.
Recurring billing or subscription services require holding customer
information such as credit card details, so please work with your
vendors on enabling this solution, as you yourself may not be
allowed to do this.
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Many vendors exist to provide these services in one or many
countries, eliminating the need to do it yourself. There are many
vendors, and factors to look for include:
a) per transaction fee b) commission fee c) fraud / enhanced rates
Fraud matters are a big concern, and still keep in mind, you the
merchant, are liable for fraud. However, this is being mitigated and
the vendors offer services that try to minimize this.
Recurring billing or subscription services require holding customer
information such as credit card details, so please work with your
vendors on enabling this solution, as you yourself may not be
allowed to do this.