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Introduction toElectronic Processing
College of General Studies
22
A gen daAgenda
Industry overview Consumer products Players - roles & responsibilities “A Day in the Life of a Transaction” Seven stages of processing
33
$4.7 Trillion $7.0 Trillion $8.3 Trillion
1994
Visa
Checks57.6%
Cash18.6%
OtherCards
OtherGeneralPurpose
Cards6.0%
6.6%
5.9%
5.3%Other*
2001 2003
*Money Orders, TCs, Food Stamps, Preauth and Remote PaymentsSource: BEA, Nilson Report, and Visa Estimates
Personal Consumption
Visa
Checks48.7%
Cash16.0%
OtherCards
Other GeneralPurpose
Cards
12.1%
10.0%
4.6%
8.7%Other*
Visa
Checks45.4%
Cash15.0%
OtherCards
Other GeneralPurpose
Cards
13.9%
11.0%
5.8%
8.9%Other*
44
Consumer Products - Payment Credit cards
– Classic– Commercial– Proprietary
Debit cards– Classic– Gift– EBT
Checks
55
Consumer Products - Marketing/Value Add
Loyalty/frequency Smart cards/chip cards Contactless
– Wireless– Radio frequency
66
Consumer Products - Authentication Personal Identification Number (PIN) Smart cards/chip cards Biometrics Age verification Address Verification
77
Credit Cards vs. Debit CardsCredit
Credit balance “open to buy”
Promise to pay Bank Loan Billed monthly Signature required
Debit Checking/savings
account balance Reserved funds Consumer owned Subtracted daily PIN or signature
required
88
Key Debit Statistics Nearly 140 million Visa check
cardholders Over $400 billion in annual volume
– 7 billion annual transactions Significant cardholder loyalty
– Cardholders prefer debit to other payment methods for purchases of $20-$100
– Nearly two-thirds of users would switch banks to keep debit card
Source: Visa Statistical Reports 6/03, Visa Debit Tracker 2002
99
On-Line (PIN) vs. Off-Line (Signature) Debit
On-Line Guaranteed funds PIN-based Posting at time of
authorization Regional debit
network rules
Off-Line Reserved funds Signature-based Authorization, clearing,
then posting Visa/MC rules
1010
Cardholder vs. MerchantCardholder
Contract with Issuer Buys goods/services Cardholder promises
to pay Issuer
Merchant Contract with Acquirer Sells goods/services Acquirer promises to
pay Merchant
1111
Issuer vs. AcquirerIssuer
Contract with Consumer Card issuance Issues authentication and
authorization Pays Association (V/MC) Reimbursed by
Cardholder Bills fees to Cardholder Issuing BIN/ICA
Acquirer Contract with Merchant Card acceptance Requests authentication
and authorization Pays Merchant Reimbursed by
Association (V/MC) Bills fees to Merchant Acquiring BIN/ICA
1212
Visa/MasterCard vs. Other CardsV/MC = Association
VISA and MasterCard Visa not for profit Membership-based Network of Issuers
and Acquirers Interchange system Funds flow between
Issuers and Acquirers
Other = Independent Amex, Discover, JCB For profit Wholly-owned Single Issuer and
Acquirer Closed-loop system Funds flow between
Consumers and Merchants
1313
Hierarchy of PlayersVisa/MasterCard Associations
Debit Card Networks
Acquirers
Merchants MLS Processors
ISO/MSP
MLS
Merchants Merchants
Merchants
1414
Roles and Responsibilities Visa and MasterCard
Associations/Debit Card Networks – Provides infrastructure for Interchange,
clearing and settlement– Monitor and produce guidelines for risk– Produce operating rules and regulations– Promote their brand recognition and
acceptance– Provide statistical analysis– Develop new products, services, segments
1515
Roles and Responsibilities Acquirer
– The Association/Debit Card Network member
– Carries ultimate liability for ISO and Merchant
– May provide various levels of back office support
– May also be a Processor– Third party to merchant contracts– Underwriting for ISO and Merchant
1616
Acquirer Qualifications for membership
– Regulated financial institution– Able to extend Credit or accept Checking
and/or Savings Accounts– Asset size may not exceed risk– May sponsor agents/MSPs
• ISO, TPS, IC
1717
Roles and Responsibilities ISO
– Typically a sales organization– May provide various levels of back office
support• Customer service• Request for Copy (RFC) paper pushing• Chargeback paper pushing• Statements and reporting• Underwriting• Risk monitoring
1818
Roles and Responsibilities Processor (Front-End and Back-End)
– Typically a transaction-based company– Provides connectivity to the Associations
for authorization, clearing and settlement– Provides various levels of back office
support
1919
Front-End vs. Back-End ProcessorsFront-End
Terminals and POS interfaces
Authorization Data capture Merchant terminal
balancing Sends batch files to
Back-End Processor Technical support 24/7 Base I/INAS
Back-End Multiple interfaces with
Front-End Processors Clear transaction (batch)
into interchange Creation of Merchant
ACH Chargeback and RFC
processing Risk monitoring Merchant statements Base II/INET
2020
“A Day in the Life of a Transaction” Cardholder presents card to Merchant for
payment Merchant obtains authorization for sale Merchant submits sale to Acquirer Acquirer submits sale to Visa or MasterCard Visa or MasterCard interchanges the sale and
debits the Issuer and credits the Acquirer Issuer bills Cardholder Acquirer pays Merchant
2121
Seven Stages of Processing1 - Authorization
2 - Merchant Balancing
3 - Capture
4 - Clearing
5 - Interchange
6 - Settlement
7 - Merchant ACH
2222
1 - Authorization Merchant requests an authorization from the
Front-End Processor If Visa or MasterCard (V/MC), Front-End
Processor transmits authorization to V/MC and transaction is further routed to appropriate Issuing BIN
Otherwise, Front-End Processor transmits authorization to appropriate card Issuer for approval (AX, DR, DC, JCB)
Issuer authenticates Cardholder and approves or declines the transaction amount
2323
Authorization Flow
Issuer
Front-EndProcessor
MerchantAuthorization
Reduces CardholderOpen to Buy
Merchant
MakesPurchase
Authorization
1 Authorization
Visa Base I/MasterCard
Cardholder
2424
2 - Merchant Balancing Merchant totals transactions and
balances by card type Merchant either transmits his batch to
the Front-End Processor or terminal may perform an auto close function at end of day
2525
3 - Capture Front-End Processor aggregates
Merchant batches by Acquiring BIN Front-End Processor matches
authorization data to settlement data Front-End Processor transmits card
capture files to Back-End Processor Front-End Processor may send other
card type files directly to the associated card company (AX, DR, DC, JCB)
2626
4 - Clearing Back-End Processor loads the file and checks for any rejected
transactions for invalid Issuing BIN or unknown account number (check-digit)
Back-End Processor performs compliance checks and interchange calculations
Back-End Processor performs risk management procedures and generates risk report
Back-End Processor formats the ACH deposit Back-End Processor formats daily records for Merchant
statements Back-End Processor produces reconciliation reports Back-End Processor stages the files for Visa and MasterCard to
pick up Back-End Processor may transmit files for other card types to
appropriate card company
2727
5 - Interchange (Visa and MC only) Associations pick up files from Back-End
Processor Associations process the files on their
systems to identify host returns for invalid Issuing BIN and transaction data related issues
Associations sort the transactions by Issuing BIN
Associations stage the file for theIssuer to pick up
2828
6 - Settlement Calculate fees and deductions (i.e., chargebacks) Determine the “daily net position” for the Merchant
(all other card types) Calculate interchange (Visa/MC only) Determine the “daily net position” for both the Issuer and the
Acquirer (Visa/MC only) Debit the Issuer’s DDA for their daily net position (Visa/MC only) Credit the Acquirer’s DDA for their daily net position
(Visa/MC only) Acquirer’s daily net position = net sales less:
– Interchange– Chargebacks– Miscellaneous adjustments– Fees
2929
7 - Merchant ACH Back-End Processor transmits Visa/MC
Merchant deposit to ACH Other card types transmit Merchant
deposit to ACH Merchant’s DDA is credited for daily net
deposits
3030
Visa/MasterCardInterchange
Transaction Processing Flow
V/MC Acquirer
Back-EndProcessor
Front-EndProcessor
ACH
Issuer
Merchant
OR
2 MerchantBalancing
3 Capture
4 Clearing
7 Merchant ACH 6 Settlement
6 Settlement
5 Interchange
$$$ Flow
Other Card Data
Visa/MasterCard Data
3131
Debit CardNetworks
Pin Based Debit Processing Flow
Debit Card Acquirer
Front-EndProcessor
ACH
Issuer
Merchant
1 Authorization
2 Capture
4 Merchant ACH
3 Settlement
3232
Summary Basic definition and terminology Players and their roles and
responsibilities Seven stages of processing “A Day in the Life of a Transaction”
Introduction toElectronic Processing
College of General Studies
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