How a card payment works, from tap to settlement

The five parties

Every card payment involves the same cast, whatever the brand on the card.

• The cardholder is you.
• The merchant is the shop, with its terminal or online checkout.
• The acquirer is the merchant's bank. It collects card payments on the shop's behalf.
• The card network is Visa, Mastercard or RuPay. It connects thousands of banks so that any card works at any shop.
• The issuer is your bank, the one that gave you the card and holds your account or credit line.

1. CardYou
2. TerminalThe shop
3. AcquirerShop's bank
4. NetworkVisa, RuPay
5. IssuerYour bank

Request

Reply

The network never holds your money and the acquirer never sees your balance. Each party does one job, and that separation is what makes the system scale.

Authorisation: the two seconds you see

When you tap, the chip in your card creates a one-time code for that payment. The terminal wraps the card details, the amount and that code into a request and sends it to the acquirer. The acquirer forwards it to the network, and the network reads the first six to eight digits of the card number to identify the issuer and route the request there.

The issuer makes the decision. It checks that the card is active, that the one-time code is genuine, that the balance or credit limit covers the amount, and that the payment does not look like fraud. Its answer travels back along the same path, and the terminal prints the result.

An approval at this stage is a promise, not a transfer. The issuer sets the amount aside so you cannot spend it twice, but the shop has not been paid yet.

What is inside the message

Most card systems speak a format called ISO 8583. A message has a four-digit type and a set of numbered fields. A few of the important ones:

Why payments fail

Field 39 is where a decline is explained. If you work in payments support or testing, you will see these daily.

Clearing and settlement: when money moves

At the end of the day the merchant's approved payments are sent for clearing. The network works out how much each issuer owes each acquirer, then nets it off, so banks exchange one figure instead of millions of small transfers. Settlement is the actual movement of that net amount between banks. The shop usually receives its money by the next working day.

This is why a refund takes days even though the purchase took seconds. The purchase needed only a promise. The refund has to travel back through clearing and settlement.

Who earns what

The shop does not receive the full amount. It pays a fee, often called the merchant discount rate, and that fee is shared three ways:

• Interchange goes to the issuer and is usually the largest share. It pays for the credit risk, fraud cover and rewards.
• The network fee goes to the card network for running the rails.
• The acquirer's margin is what remains for the merchant's bank and its payment partners.

Where a ₹18 fee on a ₹1,000 purchase might go

₹13₹2₹3

• Issuer, as interchange
• Card network
• Acquirer