Introduction toElectronic Processing

College of General Studies

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A gen daAgenda

Industry overview Consumer products Players - roles & responsibilities “A Day in the Life of a Transaction” Seven stages of processing

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$4.7 Trillion $7.0 Trillion $8.3 Trillion

1994

Visa

Checks57.6%

Cash18.6%

OtherCards

OtherGeneralPurpose

Cards6.0%

6.6%

5.9%

5.3%Other*

2001 2003

*Money Orders, TCs, Food Stamps, Preauth and Remote PaymentsSource: BEA, Nilson Report, and Visa Estimates

Personal Consumption

Visa

Checks48.7%

Cash16.0%

OtherCards

Other GeneralPurpose

Cards

12.1%

10.0%

4.6%

8.7%Other*

Visa

Checks45.4%

Cash15.0%

OtherCards

Other GeneralPurpose

Cards

13.9%

11.0%

5.8%

8.9%Other*

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Consumer Products - Payment Credit cards

– Classic– Commercial– Proprietary

Debit cards– Classic– Gift– EBT

Checks

55

Consumer Products - Marketing/Value Add

Loyalty/frequency Smart cards/chip cards Contactless

– Wireless– Radio frequency

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Consumer Products - Authentication Personal Identification Number (PIN) Smart cards/chip cards Biometrics Age verification Address Verification

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Credit Cards vs. Debit CardsCredit

Credit balance “open to buy”

Promise to pay Bank Loan Billed monthly Signature required

Debit Checking/savings

account balance Reserved funds Consumer owned Subtracted daily PIN or signature

required

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Key Debit Statistics Nearly 140 million Visa check

cardholders Over $400 billion in annual volume

– 7 billion annual transactions Significant cardholder loyalty

– Cardholders prefer debit to other payment methods for purchases of $20-$100

– Nearly two-thirds of users would switch banks to keep debit card

Source: Visa Statistical Reports 6/03, Visa Debit Tracker 2002

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On-Line (PIN) vs. Off-Line (Signature) Debit

On-Line Guaranteed funds PIN-based Posting at time of

authorization Regional debit

network rules

Off-Line Reserved funds Signature-based Authorization, clearing,

then posting Visa/MC rules

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Cardholder vs. MerchantCardholder

Contract with Issuer Buys goods/services Cardholder promises

to pay Issuer

Merchant Contract with Acquirer Sells goods/services Acquirer promises to

pay Merchant

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Issuer vs. AcquirerIssuer

Contract with Consumer Card issuance Issues authentication and

authorization Pays Association (V/MC) Reimbursed by

Cardholder Bills fees to Cardholder Issuing BIN/ICA

Acquirer Contract with Merchant Card acceptance Requests authentication

and authorization Pays Merchant Reimbursed by

Association (V/MC) Bills fees to Merchant Acquiring BIN/ICA

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Visa/MasterCard vs. Other CardsV/MC = Association

VISA and MasterCard Visa not for profit Membership-based Network of Issuers

and Acquirers Interchange system Funds flow between

Issuers and Acquirers

Other = Independent Amex, Discover, JCB For profit Wholly-owned Single Issuer and

Acquirer Closed-loop system Funds flow between

Consumers and Merchants

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Hierarchy of PlayersVisa/MasterCard Associations

Debit Card Networks

Acquirers

Merchants MLS Processors

ISO/MSP

MLS

Merchants Merchants

Merchants

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Roles and Responsibilities Visa and MasterCard

Associations/Debit Card Networks – Provides infrastructure for Interchange,

clearing and settlement– Monitor and produce guidelines for risk– Produce operating rules and regulations– Promote their brand recognition and

acceptance– Provide statistical analysis– Develop new products, services, segments

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Roles and Responsibilities Acquirer

– The Association/Debit Card Network member

– Carries ultimate liability for ISO and Merchant

– May provide various levels of back office support

– May also be a Processor– Third party to merchant contracts– Underwriting for ISO and Merchant

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Acquirer Qualifications for membership

– Regulated financial institution– Able to extend Credit or accept Checking

and/or Savings Accounts– Asset size may not exceed risk– May sponsor agents/MSPs

• ISO, TPS, IC

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Roles and Responsibilities ISO

– Typically a sales organization– May provide various levels of back office

support• Customer service• Request for Copy (RFC) paper pushing• Chargeback paper pushing• Statements and reporting• Underwriting• Risk monitoring

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Roles and Responsibilities Processor (Front-End and Back-End)

– Typically a transaction-based company– Provides connectivity to the Associations

for authorization, clearing and settlement– Provides various levels of back office

support

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Front-End vs. Back-End ProcessorsFront-End

Terminals and POS interfaces

Authorization Data capture Merchant terminal

balancing Sends batch files to

Back-End Processor Technical support 24/7 Base I/INAS

Back-End Multiple interfaces with

Front-End Processors Clear transaction (batch)

into interchange Creation of Merchant

ACH Chargeback and RFC

processing Risk monitoring Merchant statements Base II/INET

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“A Day in the Life of a Transaction” Cardholder presents card to Merchant for

payment Merchant obtains authorization for sale Merchant submits sale to Acquirer Acquirer submits sale to Visa or MasterCard Visa or MasterCard interchanges the sale and

debits the Issuer and credits the Acquirer Issuer bills Cardholder Acquirer pays Merchant

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Seven Stages of Processing1 - Authorization

2 - Merchant Balancing

3 - Capture

4 - Clearing

5 - Interchange

6 - Settlement

7 - Merchant ACH

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1 - Authorization Merchant requests an authorization from the

Front-End Processor If Visa or MasterCard (V/MC), Front-End

Processor transmits authorization to V/MC and transaction is further routed to appropriate Issuing BIN

Otherwise, Front-End Processor transmits authorization to appropriate card Issuer for approval (AX, DR, DC, JCB)

Issuer authenticates Cardholder and approves or declines the transaction amount

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Authorization Flow

Issuer

Front-EndProcessor

MerchantAuthorization

Reduces CardholderOpen to Buy

Merchant

MakesPurchase

Authorization

1 Authorization

Visa Base I/MasterCard

Cardholder

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2 - Merchant Balancing Merchant totals transactions and

balances by card type Merchant either transmits his batch to

the Front-End Processor or terminal may perform an auto close function at end of day

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3 - Capture Front-End Processor aggregates

Merchant batches by Acquiring BIN Front-End Processor matches

authorization data to settlement data Front-End Processor transmits card

capture files to Back-End Processor Front-End Processor may send other

card type files directly to the associated card company (AX, DR, DC, JCB)

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4 - Clearing Back-End Processor loads the file and checks for any rejected

transactions for invalid Issuing BIN or unknown account number (check-digit)

Back-End Processor performs compliance checks and interchange calculations

Back-End Processor performs risk management procedures and generates risk report

Back-End Processor formats the ACH deposit Back-End Processor formats daily records for Merchant

statements Back-End Processor produces reconciliation reports Back-End Processor stages the files for Visa and MasterCard to

pick up Back-End Processor may transmit files for other card types to

appropriate card company

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5 - Interchange (Visa and MC only) Associations pick up files from Back-End

Processor Associations process the files on their

systems to identify host returns for invalid Issuing BIN and transaction data related issues

Associations sort the transactions by Issuing BIN

Associations stage the file for theIssuer to pick up

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6 - Settlement Calculate fees and deductions (i.e., chargebacks) Determine the “daily net position” for the Merchant

(all other card types) Calculate interchange (Visa/MC only) Determine the “daily net position” for both the Issuer and the

Acquirer (Visa/MC only) Debit the Issuer’s DDA for their daily net position (Visa/MC only) Credit the Acquirer’s DDA for their daily net position

(Visa/MC only) Acquirer’s daily net position = net sales less:

– Interchange– Chargebacks– Miscellaneous adjustments– Fees

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7 - Merchant ACH Back-End Processor transmits Visa/MC

Merchant deposit to ACH Other card types transmit Merchant

deposit to ACH Merchant’s DDA is credited for daily net

deposits

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Visa/MasterCardInterchange

Transaction Processing Flow

V/MC Acquirer

Back-EndProcessor

Front-EndProcessor

ACH

Issuer

Merchant

OR

2 MerchantBalancing

3 Capture

4 Clearing

7 Merchant ACH 6 Settlement

6 Settlement

5 Interchange

$$$ Flow

Other Card Data

Visa/MasterCard Data

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Debit CardNetworks

Pin Based Debit Processing Flow

Debit Card Acquirer

Front-EndProcessor

ACH

Issuer

Merchant

1 Authorization

2 Capture

4 Merchant ACH

3 Settlement

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Summary Basic definition and terminology Players and their roles and

responsibilities Seven stages of processing “A Day in the Life of a Transaction”

Introduction toElectronic Processing

College of General Studies