Credit Card System Players
(1) The Merchant POS is the in-store scanner or shopping cart. Often they will help to do the initial collection of payment data. Online examples include Shopify, Magento, Drupal, and Big Platform. The Brick and Mortar POS landscape is dominated by NCR, IBM, HP, and Verifone - and Square is quickly emerging. For the most part, merchants hold an 'Approved Merchant Account (Token)' however many e-commerce platforms are now providing this as a service. Fees are usually based on a monthly fixed cost, a per-transaction fee, and an overall percent of transaction fee. Generally the POS (or sometimes Gateway) charges the merchant a single fee that covers all the downstream costs.
(2) The payment gateway is a secure connection between a POS and Processor. Historically, processor connections required such high security that it was not economical for a POS or merchant to implement themselves. Of late, these costs have come down and we now see the integration of POS, Gateways, and Processors. Examples of e-commerce gateways include Payment Gateway to Accept Online Payments, Paypal, Stripe, and Braintree. Verisign, CICS (IBM), and Payment Gateway to Accept Online Payments are the dominant in-store players.
(3) Payment Processors are responsible for collecting and routing data from the gateway to the Network. The correct Network for each transaction is identified based on the first and last card numbers (did you know 10 of the 16 card numbers are non-unique and not considered personally identifiable information?). The biggest players in processing are First Data and TSYS, followed by WorldPay, Chase Paymentech, Elavon and Wells Fargo.
(4) The Networks (or Associations or Interchanges) do the real work. They interface with the Processors to collect transaction, customer, and merchant info; the Card Issuers to authorize purchases and collect payments; and Merchant Banks to pass settled payments. As such, they have the highest fees. Visa, MasterCard, American Express, and Discover are the largest Networks.
(5) The Card Issuers are the consumer-facing element of the equation - they issue consumer cards, collect monthly payments, and handle customer service. While they rarely charge a transaction fee, they make money from consumer lending, annual fees, and late fees. The largest US issuers are American Express*, Discover*, Chase, Citi, Bank of America, Wells Fargo, and Capital One.
(6) The Merchant Bank simply accepts transactions and deals with disputes (but that is a different post).
The Network and Card Issuer are a single entity in the case of American Express and Discover. This is called a 'Closed-Loop' transaction. Transactions that use the Visa or MC Networks are considered 'Open Loop'.
**In (4), once the transaction is approved, an affirmative message is passed via the Network, Processor, and Gateway to the Merchant POS. If a transaction is declined, a similar message is passed and the POS after which the entire process is severed and no settlement occurs. It sends a reply message to the acquirer along with an authorization code.
Settlement (as referenced here) is actually a three-step process. First is Authorization, where a customer is approved for a purchase. Second is Capture, which occurs when the merchant passes a batch of authorized transactions to the Network (often each night). Third is Settlement, when the captured transactions are actually pulled from customer accounts and moved to merchant accounts. Those $0.07 charges that appear in your 'pending transactions' are the authorization charges - they are subsequently cancelled and replaced once the final transaction amount has been captured.
However, communication is not typically done directly to the acquirer - which is where processors and gateways come into play.
No money has actually changed hands at the time of the authorization - that happens through a batch process called capture or settlement (they are technically slightly different in some definitions, but used interchangeably). At capture, the acquirer is sent a message containing the credit card number, some information about the authorization (address verification/card verification responses, the merchant's descriptor - the name that appears on the credit card statement, and some indicators about how the payment was processed), and the amount to be captured. The gateway keeps the credit card information securely and sends it to the processor, who communicates it through the network. The issuers send the money to the acquirers, who put it in the merchant's bank account (either via ACH wire transfer if their primary account is at a different bank, or directly).
Gateways originally came into being (for the most part, there are other reasons such as value added services like security, fraud control, and reporting) because the processors did not typically allow any kind of direct internet connection - VPN or otherwise. Communication was usually done over leased lines or some other type of dedicated circuit. Since most merchants do not have the means or desire to maintain a leased line, gateways created an internet link to allow connection to a large number of processors, while also simplifying the communication with those processors and providing value-added services.
(2) The payment gateway is a secure connection between a POS and Processor. Historically, processor connections required such high security that it was not economical for a POS or merchant to implement themselves. Of late, these costs have come down and we now see the integration of POS, Gateways, and Processors. Examples of e-commerce gateways include Payment Gateway to Accept Online Payments, Paypal, Stripe, and Braintree. Verisign, CICS (IBM), and Payment Gateway to Accept Online Payments are the dominant in-store players.
(3) Payment Processors are responsible for collecting and routing data from the gateway to the Network. The correct Network for each transaction is identified based on the first and last card numbers (did you know 10 of the 16 card numbers are non-unique and not considered personally identifiable information?). The biggest players in processing are First Data and TSYS, followed by WorldPay, Chase Paymentech, Elavon and Wells Fargo.
(4) The Networks (or Associations or Interchanges) do the real work. They interface with the Processors to collect transaction, customer, and merchant info; the Card Issuers to authorize purchases and collect payments; and Merchant Banks to pass settled payments. As such, they have the highest fees. Visa, MasterCard, American Express, and Discover are the largest Networks.
(5) The Card Issuers are the consumer-facing element of the equation - they issue consumer cards, collect monthly payments, and handle customer service. While they rarely charge a transaction fee, they make money from consumer lending, annual fees, and late fees. The largest US issuers are American Express*, Discover*, Chase, Citi, Bank of America, Wells Fargo, and Capital One.
(6) The Merchant Bank simply accepts transactions and deals with disputes (but that is a different post).
The Network and Card Issuer are a single entity in the case of American Express and Discover. This is called a 'Closed-Loop' transaction. Transactions that use the Visa or MC Networks are considered 'Open Loop'.
**In (4), once the transaction is approved, an affirmative message is passed via the Network, Processor, and Gateway to the Merchant POS. If a transaction is declined, a similar message is passed and the POS after which the entire process is severed and no settlement occurs. It sends a reply message to the acquirer along with an authorization code.
Settlement (as referenced here) is actually a three-step process. First is Authorization, where a customer is approved for a purchase. Second is Capture, which occurs when the merchant passes a batch of authorized transactions to the Network (often each night). Third is Settlement, when the captured transactions are actually pulled from customer accounts and moved to merchant accounts. Those $0.07 charges that appear in your 'pending transactions' are the authorization charges - they are subsequently cancelled and replaced once the final transaction amount has been captured.
However, communication is not typically done directly to the acquirer - which is where processors and gateways come into play.
No money has actually changed hands at the time of the authorization - that happens through a batch process called capture or settlement (they are technically slightly different in some definitions, but used interchangeably). At capture, the acquirer is sent a message containing the credit card number, some information about the authorization (address verification/card verification responses, the merchant's descriptor - the name that appears on the credit card statement, and some indicators about how the payment was processed), and the amount to be captured. The gateway keeps the credit card information securely and sends it to the processor, who communicates it through the network. The issuers send the money to the acquirers, who put it in the merchant's bank account (either via ACH wire transfer if their primary account is at a different bank, or directly).
Gateways originally came into being (for the most part, there are other reasons such as value added services like security, fraud control, and reporting) because the processors did not typically allow any kind of direct internet connection - VPN or otherwise. Communication was usually done over leased lines or some other type of dedicated circuit. Since most merchants do not have the means or desire to maintain a leased line, gateways created an internet link to allow connection to a large number of processors, while also simplifying the communication with those processors and providing value-added services.
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