Card processing networks: The backbone of payments facilitation

Whether it’s in person or online, much of today’s payments are made using cards, both credit and debit. We simply swipe or enter our details online, and the money disappears from our account. For most people, that’s all they need to consider. There’s no practical reason for them to understand the processes behind card payments and how funds get from point A (your account) to point B (the merchant’s account).

They’ve heard of Visa, Mastercard, and American Express but have little understanding of the payment infrastructure behind them and how they prop up the business world. Statistics from 2021 show over 70% of point-of-sale payments were made using some form of card (debit, credit, or prepaid). Card processing networks truly are the backbone of global payment systems.

While consumers can get away with it, ignorance is not bliss if you want to run a business. Companies need to have a good working knowledge of card processing networks and the tools they need to accept card payments.

So let’s walk you through the card payment process from start to finish and learn how the processing networks facilitate modern commerce.

Initiating a payment

The first step is pretty simple: a person or business chooses to make a purchase using a card. If it’s a business, there may be an internal approval workflow to clear first. What are payment approval workflows? They are steps required for a company to trigger a payment, for example seeking approval from the relevant manager or owner. Typically, they ensure transparency, oversight, and accountability, as well as catch any errors.

Once the card payment is finalized, a request is sent to the card issuer to make a payment to the merchant.

The card processing network

This is where the card processing network takes over. You may not realize it as just a customer, but every time you use your card, you are communicating via the card processing network. Customers, merchants, and financial institutions pass the information on every purchase through the network.

This is what makes it possible to seamlessly accept, authorize, verify, and approve card payments. Beyond facilitating transactions, card processing networks define the rules merchants must follow when accepting cards.

In the past, merchants might only accept one or two payment networks. But with the rise of cards and the fall in cash usage, most businesses now accept all major payment networks (Visa, Mastercard, American Express, Discover, etc.).

Back to the payment process itself – after the customer confirms the payment, the card issuer effectively loans them the money for the purchase. The payment network associated with the card in use gathers all the necessary information (the parties involved and the intended purchase), passing it to the customer and merchant’s banks.

The Banks

Two banks are involved:

• Issuing bank (Operating on behalf of the customer): the debit or credit card provider responsible for authorizing payments. This includes setting the cardholder’s ability to make purchases and approving or denying purchase requests.
• Acquiring bank (Operating on behalf of the merchant): the institution that processes card transactions on behalf of the merchant, receiving the money from the customer’s issuing bank.

After receiving payment details from the card processing network, the acquiring bank requests payment authorization from the card-issuing bank. Again, this request is communicated through the card processing network. If approved, the money is sent from issuing to the acquiring bank, and the payment is complete.

Sometimes financial institutions act as both the payment network and the card issuer. This is referred to as a “closed network.” Examples include American Express and Discover. In contrast, an “open network” is a card processing network that does not issue cards. These include Visa and Mastercard.

Connecting merchants to a card processing network

Businesses access various card processing networks through a payment gateway. The payment gateway forms the connection between merchants and acquiring banks, sending information on each purchase. Generally, this process occurs at point-of-sale terminals (in-person purchases) or through an online payment service.

Payment gateways simplify the transaction process, offering merchants the technology to begin accepting cards. Merchants looking to enable other payment methods, such as digital wallets (e.g., PayPal, Venmo, Apple Pay, etc.), will need to implement additional payment systems.

The costs involved

Unfortunately, this doesn’t come for free, and merchants must pay fees at different stages of the card payment process. These fees go to the card processing network and banks for facilitating the transactions. In general, there are three main types of processing fees for merchants to consider:

• Interchange fees: Paid to the card issuer for every transaction, interchange fees are a flat rate along with a small percentage of the total sale. Typically, fees are smaller for debit cards compared to credit cards.
• Payment processor fees: Paid by the merchant for use of payment processing services, tools, and equipment. Payment processor fees could include a monthly fee, fees for every transaction, and equipment fees. They are also referred to as merchant service fees.
• Assessment fees: Paid to the card processing network each month, with the final figure depending on the number of sales facilitated. Unlike interchange fees, assessment fees are only paid after receiving the funds.

The importance of the card processing network

While modern technology is facilitating a range of new payment methods, card payments continue to play a dominant role in the movement of money between parties. To facilitate a card payment, all four parties involved (the customer, merchant, and the respective banks) must communicate information back and forth. With quick payment expected and security of the utmost importance, it is the card processing network that connects everyone together, keeping the money flowing.