Payment ecosystem

A transaction is an electronic message that carries data, which is used for payment processing. Transactions generally originate when cardholders perform any payment transactions, either online, in-app purchases, ATM withdrawals or over the counter at a point of sale (POS) terminal.

Payments in a nutshell

In the payment automated system, transaction-processing is enabled as per the following processes.

• Authorization – It is the process to determine the customer’s card validity which includes financial checks as well as non-financial checks. Users can perform the transactions based on the business criteria setup for a particular card, the card account must contain an ample amount of funds to authorize the transaction. Once all the checks and required criteria are met, then the card account will get a temporary hold on those funds. The hold will remain until the clearing is processed.

• Clearing – It is the process of finalizing the transaction amount and successfully posting the transaction on the card account. The clearing is initiated by the merchant. If clearing is not received and processed within a specified time then the funds held on the card account will be released.

• Settlement – It is a process which is used to transfer the funds from the cardholder's bank to the merchant’s bank or vice versa.

Transactions can be authorized, cleared, and settled either as dual-message transactions (known as a Dual Message System) or as single-message transactions (known as a Single Message System). The processing method may vary depending upon the payment method issuer, the type of card, or the region in which the transaction takes place.

• A single-message transaction can be recognized when the merchant submits a single electronic message containing all data required for the authorization, clearing, and settlement of the transaction.

• A dual-message transaction can be recognized when the merchant submits an electronic message containing the information required for an authorization decision at the time of purchase and later point in time, the merchant submits a second message which contains an additional data required for clearing and settlement.

Most transactions processed by merchants are dual-message transactions. Single-message transactions usually occur when a cardholder uses their PIN at a point of sale or at an ATM.

Few other common transaction types besides authorization and clearing include:

• PIN based transactions – These transactions recognized when a cardholder performs a payment transaction by using its PIN. These transactions typically contain all information required for authorization and clearing in a single electronic message.

• Reversals – These type of transaction recognized when a merchant cancels a transaction after the authorization has succeeded but before the clearing has taken place. Reversals can be initiated for partial amount or full amount.

• Refunds – These transactions occur when a cardholder requests a merchant to return the funds for a transaction after the clearing has completed for it.

• Chargebacks – These are recognized as a dispute transactions and usually initiated by the issuer processor on behalf of their cardholders.