The title of this post might be vague, but let me add the missing bit “What happens when you buy a sandwich with your card”. Have you ever wondered what really happens? How and why does the card work?
While I learned recently about the topic due to my job’s nature, I read this article recently which explains it very well. The article is written by the x-CEO himself of a digital bank. I highly recommend reading the article but if you are too lazy to do so, I can summarise it quickly below.
Let’s say you want to buy a sandwich and you ask the seller to pay using your card. They present you with a card machine. The card machine is called the point of sale (POS). You enter the card into the machine, provide the pin, and the machine checks the pin against the credentials stored on the card. If accepted, some stuff happens that you don’t see.
First the machine contacts the merchant’s bank, either directly or via a backend in the middle. The merchant’s bank is mostly referred to as the acquirer, because they acquire the funds on behalf of the merchant. The acquirer bank does some checks (i.e. Fraud), then the acquirer wants to contact your bank to receive the amount they need for the sandwich.
In order to contact your bank, acquirers in that case utilise payment networks like Visa and MasterCard (V/MC). Visa and MasterCard are payment networks that establish some sort of connection protocols that banks utilise to talk to each other. Banks use the card details to contact V/MC and V/MC handles calling your bank.
There are some checks also that V/MC does on the transactions and then they pass the message to the issuing bank. The issuing bank is the bank that issued the card, in this case it’s your bank. Your bank does additional checks like fraud and balance checks, in case someone stole your card or you don’t have enough balance.
If all is good, the message travels back to the POS to mark the payment as successful so you can enjoy your meal :)
Does that mean the money moved right away from your bank to the merchant’s bank? Actually no, this happens later via a process called Settlements. This is the case where V/MC dump files with records to the issuing bank asking them for the sum of money for the transactions that succeeded, and then settles the money into the merchant’s acquirer bank so the merchant can get paid. This process usually takes around 2-3 days. It can take more in some countries, but it has improved a lot in other countries.
I hope you have enjoyed this post and learned one thing or two, please don’t forget to read the original article as it has more detailed information :)