Payment Processing Workflow – Authorization, Clearing and Settlement
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In payment processing, the cardholders make payment card purchases from merchants, merchants send payment transaction data to their acquirers, and acquirers send payment transaction data through the payment network to the issuer. The issuer is the one that actually issues the card to the cardholder and, each time the cardholder makes a purchase, provides transaction authorization to the merchants acquiring bank.
At the time of purchase, the merchant requests and receives authorization to allow the purchase to be conducted, and an authorization code is provided. The process includes:
- The cardholder swipes or dips card at the merchant location.
- The acquirer (that is, the merchants bank) asks the payment brand network to determine the issuer (that is, the cardholder’s bank).
- The payment brand network determines the issuer and requests approval for purchase.
- The issuer approves the purchase.
- The payment brand network sends approval to the acquirer.
- The acquirer sends approval to the merchant.
- The cardholder completes the purchase and receives a receipt.
In the Clearing process, the acquirer and issuer need to exchange purchase information to complete the transaction. The process includes:
- The acquirer sends purchase information to the payment brand network.
- The payment brand network sends purchase information to the issuer, which prepares data for the cardholders statement.
- The payment brand network provides complete reconciliation to the acquirer.
This process usually occurs within one day in North America and may vary in other countries.
The final step in the payment process is settlement. The merchants bank pays the merchant for the cardholder purchase and the cardholders bank bills the cardholder. This process includes:
- The issuer determines the acquirer via the payment brand network.
- The issuer sends payment to the acquirer.
- The acquirer pays the merchant for cardholders purchase.
- The issuer bills the cardholder. This step in the process is usually complete within two days or less in North America and may vary in other countries.