Understanding credit card payments
- Neil Mathieson
- Apr 27
- 3 min read
Updated: Apr 28
Take Aways
Credit and cards remain favoured by eCommerce customers in major markets.
Complexity arises from the multiple stakeholders involved in the processing and settlement of card transactions.
Risks and costs in the payment journey can be managed if merchants and PSPs work closely.
Rapid changes in the payment landscape require stakeholders to adopt a proactive approach and ensure business model agility.
Quick Navigation
What is the credit card payment journey?
The life cycle of credit card payments, from a customer placing an order to the retailer being settled, involves multiple financial and technology service providers.
Although the original transaction may occur in real-time, final settlement of all cashflows is significantly later. Numerous risks including fraud and credit exist, as do fees including transactions and interchange.
How does a credit card payment work?
For ease we have simplified. The customer is the cardholder, and the seller is a merchant or marketplace. The payment acquirer is a regulated agent of the card issuer and card schemes. Connecting the ecosystem are technology providers like payment gateways that have real-time integrations to the seller’s web shop, token providers, and the payment acquirer.
There are variations, especially the PayFac model where a single player takes multiple roles to capture a greater share of value.
What is the process of a credit card payment?
Cardholder and presses pay on Merchant website.
Data is transferred to Gateway where is it tokenised.
Transaction is routed by Gateway to Acquirer in encrypted form.
Acquirer sends message to the Issuer to verify.
Issuer confirms with Card Scheme that Cardholder is legitimate (authentication) and funds are available (authorisation).
Card Scheme passes response to Issuer and Acquirer.
Acquirer sends success / fail message to Gateway.
Gateway sends success / fail message to Merchant.
Merchant website sends success / fail message to Cardholder.
Merchant is paid in arrears by Acquirer, net of chargebacks, fees, reserve adjustment.
Gateway charges Merchant separate fee.
In many markets it is also mandatory to have a two-factor authentication by the cardholder in the process.
Common problems in the card payment journey
Due to the complex construct errors are possible, although in practice businesses carefully monitor their performance using metrics such as conversion ratio, acceptance rate, disputes, chargebacks, losses to fraud, and technology error codes.
Cardholders
Card detail error or expiry.
Fails two factor authentication.
Customer has insufficient funds.
Merchants and Marketplaces
Fail PCI DSS requirement.
Card Schemes and Issuers
Transaction declined as suspect (amount, location, currency, pattern, etc).
Transaction fails random velocity check.
Risks in the payment journey
Payment Fraud
Financial crime is a global pandemic affecting individuals, corporates, and financial institutions. Mastercard research estimates global eCommerce losses to fraud are approx. USD 50bn per annum and expect this to rise as criminals embrace technology to stage more elaborate phishing, identity theft, account takeover and cyber-attacks.
Chargebacks
Customers often challenge payments. Whilst most will be settled amicably, there are instances of first party fraud / chargeback fraud where the cardholder cancels the payment with the card issuer thus leaving the merchant with a loss. If a merchant has a history of disputes or chargebacks the issuer will retain a rolling reserve to cover such eventualities.
Credit Risk
Credit risk is the risk that a counterparty does not settle their obligation, in full, when due or thereafter. As settlement happens in arrears there is credit risk in the payment journey, notably by on Issuer by the Cardholder, and on the Merchant by the Acquirer (albeit they are regulated Payment Institutions or eMoney Institutions).
Technological Failure
Delivering excellent customer experience requires seamless and secure integration of webshops, mobile apps, payment gateways, token providers and payment acquirers. Failure of any element will result in cart abandonment and failed payments, damaging sales and reputation.
Summary
Credit cards remain convenient for customers and therefore important for retailers. Nonetheless, the industry structure remains complex, leading to criticism about opacity, speed and cost.
Demand for better payment experiences are now driving rapid change, as seen by the growth in alternative payment methods, account-to-account settlement, and the PayFac business model.
To remain relevant, all participants must retain focus on customers while taking opportunities to optimise their products, processes and technologies.
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