Digital Money: online payments and swiping
Now unless you live under a rock you most probably have come across debit or credit cards linked to a bank account. In fact I'm willing to bet you have probably used one to pay at a shop check out or a restaurant or even from an On line store like Amazon.
How does it all work? How does the money move from your bank account to the merchants?
On-line payments were worth over $700 Billion in 2017 and that number is going only one way - UP! So its a good idea to understand how it all works.
Whether for debit cards or credit cards the mechanism is pretty similar.
You have a few actors involved;
First there's you, the Consumer. With that shiny bit of plastic (your debit/credit card). That card gives you access to your money without you ever having to set foot in the bank.
Second play is your bank, they gave you that card so we'll call them the Issuing Bank. They'll also be the guys that hand over the cash when the time comes. Generally upstanding honest guy. . .at least thats what we are told.
Now you're gonna spend your money on something - at a shop or perhaps a take away - such a place is called a Merchant and they maintain a merchant bank account with a bank.
The bank that holds the merchant account is called the Acquirer. They'll the receive (on the merchants behalf) the cash when its all done and dusted.
Last but not least is the Processing Network which links everyone together to enable a secure smooth conversation takes place. This would be your VISA, Mastercard etc.
Now that we know the players - here's how the game goes;
When you swipe or tap your card on a point of sale (POS) device in a shop or enter you card details on an Online store's check out, a message is sent from the POS device to theShop's Merchant's bank Acquirer. This message contains details that identify you, the amount of the purchase etc.
The Acquirer passes this on to the Processing Network who will authenticate the request and then forward it toyour bank the Issuer.
The Issuer performs further authentication, checks that your the Customer's account has enough money to cover the purchase, freezes the amount to prevent use.
The money safely frozen, the Issuer responds with 'success' to the Processing Network who relays this to the Acquirer and finally to the Merchants POS. The merchant can now let your leave with what you bought, secure in the knowledge that their money will be received later.
This first phase of the transaction is called AUTHORIZATION and it takes 2-3 seconds.
Now that assurances of payment hve been given phase two can commence. The Acquirer send the details of the completed transaction to the Processing Network, who will sort this and all other transactions globally and send consolidated batch transaction file to all the Issuer's around the world. Each Issuer will debit the frozen amounts from the Consumer accounts and move the money to some kind of Collection/holding account. This second phase is called CLEARING.
The last phase is to move money from Issuer's to Acquirers equivalent to the total value of the Consumer transactions. The Acquirer credits the Merchant account and ofcourse takes a cut.
(Oh, by the way did I mention everyone gets a cut of what the consumer pays?). This last phase is called SETTLEMENT.
So thats it, your money hops through quite a few hands before it gets to its destination. loads of messages are sent back and forth, and of-course everyone gets a cut of your money.
This system of payment allows for better accountability, recourse in case of a dispute and as a last means corporate entities that you can sue the pants off if it comes to that. This accountability comes at a price though, your bill is inflated by the fees that each party levies for getting your money where it needs to go.
Contrast this against Bitcoin that is completely free of charges as it is peer to peer and is generally more secure. But it has no corporate accountability and no dispute mechanism.
Which do you think works best? Will one of these to fall off soon? Drop a comment and let us know what you think.
How does it all work? How does the money move from your bank account to the merchants?
On-line payments were worth over $700 Billion in 2017 and that number is going only one way - UP! So its a good idea to understand how it all works.
Whether for debit cards or credit cards the mechanism is pretty similar.
You have a few actors involved;
First there's you, the Consumer. With that shiny bit of plastic (your debit/credit card). That card gives you access to your money without you ever having to set foot in the bank.
Second play is your bank, they gave you that card so we'll call them the Issuing Bank. They'll also be the guys that hand over the cash when the time comes. Generally upstanding honest guy. . .at least thats what we are told.
Now you're gonna spend your money on something - at a shop or perhaps a take away - such a place is called a Merchant and they maintain a merchant bank account with a bank.
The bank that holds the merchant account is called the Acquirer. They'll the receive (on the merchants behalf) the cash when its all done and dusted.
Last but not least is the Processing Network which links everyone together to enable a secure smooth conversation takes place. This would be your VISA, Mastercard etc.
Now that we know the players - here's how the game goes;
When you swipe or tap your card on a point of sale (POS) device in a shop or enter you card details on an Online store's check out, a message is sent from the POS device to the
The Acquirer passes this on to the Processing Network who will authenticate the request and then forward it to
The Issuer performs further authentication, checks that your the Customer's account has enough money to cover the purchase, freezes the amount to prevent use.
The money safely frozen, the Issuer responds with 'success' to the Processing Network who relays this to the Acquirer and finally to the Merchants POS. The merchant can now let your leave with what you bought, secure in the knowledge that their money will be received later.
This first phase of the transaction is called AUTHORIZATION and it takes 2-3 seconds.
Now that assurances of payment hve been given phase two can commence. The Acquirer send the details of the completed transaction to the Processing Network, who will sort this and all other transactions globally and send consolidated batch transaction file to all the Issuer's around the world. Each Issuer will debit the frozen amounts from the Consumer accounts and move the money to some kind of Collection/holding account. This second phase is called CLEARING.
The last phase is to move money from Issuer's to Acquirers equivalent to the total value of the Consumer transactions. The Acquirer credits the Merchant account and ofcourse takes a cut.
(Oh, by the way did I mention everyone gets a cut of what the consumer pays?). This last phase is called SETTLEMENT.
So thats it, your money hops through quite a few hands before it gets to its destination. loads of messages are sent back and forth, and of-course everyone gets a cut of your money.
This system of payment allows for better accountability, recourse in case of a dispute and as a last means corporate entities that you can sue the pants off if it comes to that. This accountability comes at a price though, your bill is inflated by the fees that each party levies for getting your money where it needs to go.
Contrast this against Bitcoin that is completely free of charges as it is peer to peer and is generally more secure. But it has no corporate accountability and no dispute mechanism.
Which do you think works best? Will one of these to fall off soon? Drop a comment and let us know what you think.
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