Thread by @FinFloww

How does credit card processing work?

So we all know what credit cards are , right? Those magic cards which you pick out from your pockets and buy whatever stuff you want but do you know how this whole payment process works when you swipe the card?

What’s the architecture behind it?

We will try to understand this process with a very simple example.

So let’s say you go to your favourite restaurant, although going out has really become a dream lately.

Okay so after the meal it’s time to pay.

Now, you take the help from your little card friend and simply swipe it in the POS machine

The first step is the Authorization. The machine will send an authorization request to your bank, but it’s not simple.

First the request will move through a payment gateway also called payment processors.

The main job of the payment gateway is to securely transfer your credit card information on the network, so basically it’s your bodyguard.

Now your request will arrive at a credit card processor such as visa and mastercard. (Remember when we put in our card details we don’t give our bank name, we just simply put down our card number and the system identifies whether it’s a visa , mastercard or Rupay.)

Okay great, now your request is waiting at the visa office and from here it will be redirected to your bank.

Now your bank will approve your payment request and it will send back a Yes signal back through this route.

Awesome payment is complete, all this hefty process is completed in just a matter of seconds.

For you it may be over but not for the restaurant, they will have to send a batch(details of all the transactions) at the end of the day to the payment processors so that they can get the money in their own account

Now the transaction is settled.

Uff a lot of work for some few bucks. Now there’s one more catch :- The Interchange fees.

As a customer you are paying 100 rupees for your meal but when you are paying through the credit card the restaurant will only get 98 Rs. Why so?

A very nominal percentage of the total billed amount is taken by the payment gateway + payment processors (visa , mastercard)+ Banks.

That’s how this whole magic is working.

Now the question arises: If merchants have to pay some fee then why are they accepting these cards?

Can’t they just accept cash and do business the old style.

But that’s not how the economy will expand.

People use credit cards in the hope that they will be able to pay in the future.

Basically they are not borrowing money from the bank but they are borrowing it from their future self.

In an economy where credit is not available then that economy is bound to go into recession.

That’s why credits are important and merchants have to accept them.

https://twitter.com/FinFloww/status/1421142962910601218?s=20

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