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Transaction Flow Explained

In the simplest of terms, a transaction flow is the journey a payment takes from start to approval to settlement. Any time a person buys something using a credit card, it follows a stream or transaction flow, passing through many players before the payment is settled. Knowing how a transaction electronically passes from a customer to a merchant’s bank account, which is known as a transaction flow, is something every business should understand. Knowing this information also helps you get a clearer perspective and the importance of batch deposits, the risks of chargebacks, and the length of time it takes for funds from transactions to become available into your account.

The average transaction takes just seconds to be approved, but, this will seem surprising considering all of the players involved in the transaction flow. The main parties involved from the time a card is swipe until it is approved are: the customer, the merchant, an acquiring bank, payment processing networks operated by credit card companies, and the card issuers, such as Visa or MasterCard. The transaction flow includes 8 steps.

Step 1: A customer/cardholder choses an item and then, presents a credit card to the merchant to purchase it.

Step 2: After the card is swiped, the merchant’s acquiring bank requests an electronic authorization from the cardholder’s bank account, so it can be verified that the funds are available.

Step 3: The electronic authorization, then, passes through the payment processing networks.

Step 4: Based on fund availability, the credit card-issuing bank will either approve or decline the transaction. The information, including the approval code for the transaction, are based back to the networks, the acquiring bank, and then, finally delivers it to the merchant’s point-of-sale machine or card reader.

Step 5: The credit card-issuing bank transfers the money to the acquiring bank as a reimbursement for the item the customer just bought.

Step 6: The acquiring bank deposits the funds into the merchant’s bank account.

Step 7: The credit card-issuing bank bills the customer for the purchase made.

Step 8: The customer pays his/her credit card bill for the purchase that was made.

The funds flow like this for every credit card transaction around the world.

Here is a real example that can help more clearly explain the transaction flow cycle. Customer, Jane, walks into a retail store and buys $75 worth of clothing. She brings her goods to the counter and then, the merchant’s clerk instructs her to swipe or insert her payment card, using the terminal. Once her credit card is entered, her card information is captured and a request for authorization is transmitted to Jane’s bank, to verify that she has enough funds to cover the $75 cost of the clothing. If the funds are available, the merchant’s terminal gets a response, noting the purchase is approved or declined. If the transaction is declined, a response code, which indicates the reason for the denial, is sent. If it is approved, $75 is authorized to be deducted from Jane’s account. Then, the acquirer deposits the funds minus its agreed-upon fee percentage to the merchant’s account.

In a way, batch and real-time processing also are part of the transaction cycle. The biggest difference between batch and real-time is how long it takes for transactions to be made available to the receiver/merchant. Batch processing is a cost-effective method of high-volume transaction processing, however, there is always a time lag between the point it occurs and when it actually shows up in the merchant’s account. Therefore, though a transaction has already been approved, it may take a day or two to show up in a merchant’s account.

Real-time systems process transactions individually at the moment or almost close to the moment an event occurs. Since there is no wait to batch transactions, there is no delay between the transaction occurrence and the recording of it into the merchant’s account. The funds show up in a merchant’s account within seconds.