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11.2 Using Payment Cards Online 339

Processing Cards Online
the credit card issuers. Most credit cards do not
have an annual fee. However, holders are charged The processing of credit card payments has two major
interest if the balance is not paid in full by the due phases: authorization and settlement. Authorization deter-
date. Visa and MasterCard are the leading cards. mines whether a buyer’s card is valid (e.g., not expired) and
2. Charge cards. These are special credit cards where whether the customer has sufficient credit or funds in his or
the balance must be paid in full by the due date and her account. Settlement involves the transfer of money from
usually have annual fees. Examples of issuers are the buyer’s account to the merchant’s. There are a number of
American Express and Diner’s Club (they both parties involved in both processes including:
offer regular credit cards as well).
3. Debit cards. Payments made with a debit card are
withdrawn from the holder’s checking or savings
account. The actual transfer of funds usually takes • Customer. The individual possessing the card.
place in real time from the holder’s account (if an • Merchant. The vendor that sells goods or services.
ATM card is used). However, a settlement to a mer- • Issuing bank. The issuer (usually a bank) of the
chant’s checking account may take place within credit (debit) card to customer (or businesses).
1–2 days. Again, MasterCard and Visa are exam- Services customer accounts including billing and
ples of debit card issuers. For a discussion of some collecting month payments.
best practices for debit card usage, see usatoday. • Merchant acquiring bank. Enrolls merchants into
com/story/tech/columnist/komando/2014/04/11/4- a program that accept a specific card brand (e.g.,
places-you-should-not- swipe-your-debit-card/ Visa) and, on the merchant’s behalf, processes debit
7436229. or credit card payments made using that particular
card brand.
• Credit card (association) network. Credit card
networks determine where credit cards can be used
Credit Card Reading and facilitate the payment process between credit
card users, merchants, and credit card issuers.
When paying with a credit card, it is necessary for merchants • Payment service provider. The company that pro-
to read the content of the card and then transfer the content vides electronic connections and transaction ser-
for approval and processing. This must be done in almost vices among all the parties involved in electronic
real time. payments (including authorizations). A payment
Several methods are available. service provider is also called a payment gateway
provider.

• Stationary card readers. The most common readers
available are physical POS in stores. They are wire- The roles that the participants play, the linkages among
lined to the authorization and processing system. them and the general flow of the authorization and settlement
• Portable card readers. These are used in places processes are depicted in Figure 11.2. For any given card and
where wirelines do not exist (e.g., on airplanes). merchant there can be variations in the exact players and in
They may be connected wirelessly to the processing the details of the process. However, regardless of whether the
system, or may be stand-alone systems (sellers then payment is being made off-line or online, they usually
take risks, usually for small payments). include:
• Mobile readers. These systems enable payments
from mobile devices. They include credit card read- • Authorization Cycle—[1] The customer initiates a pay-
ers, which are plugged into the smartphones. The ment transaction (fills out Web page, swipes a card, etc.).
Square Reader (squareup.com), which has a The merchant receives the transaction information [2].
“swiper” that plugs into the smartphone’s head- This information is passed to its PSP where it is routed [3]
phone jack and reads the information from the mag- to the merchant’s acquiring bank (processor). The acquir-
netic strip of the customer’s card, is such a device ing bank passes the information [4–5] to the issuing bank
(see Section 11.5). through the credit card network. If the issuing bank
approves the transaction, an authorization code is sent