A payment is a series of debit/credit entries that affect the asset and liability side of multiple ledgers. A typical payment consists of a payer (customer, buyer) and a payee (merchant), where the payer’s account is debited and payee’s account is credited.
Push Payment: Payers instruct their banks to send money from their accounts to recipients’ accounts.
Pull Payment: Recipients’/Payee’s banks extract money from payers’ accounts.
A financial institution with banking license that provides payment cards to Payers. Also known as issuing bank, an issuer authorizes and facilitates payment to payee.
A financial institution with banking license that receives payment from the payer (i.e. issuer) on behalf of the payee.
A financial institution that facilitates communication and transaction between the issuer, acquirer, and any other party in between. Payment cards that issuer provides to payers are technologically powered by card networks. Example: Mastercard, Visa, RuPay.
Clearance is the exchange of transaction data between the card network, issuer and acquirer for reconciliation purposes. This includes sending transactions to the issuer for posting to payee’s account. Clearance generally occurs within one day of the payment.
Settlement is the actual transfer of funds . Post successful clearance, issuer transfers thenet value of the cleared transactions to the card network. The card network then sends the funds to the acquirer. Finally acquirer transfers the funds to the payee. Settlement generally occurs within two days of the payment.
Authentication and authorization
Authentication is the verification of the payer’s identity to process a payment. When a payer presents card details to the payee, the acquirer contacts the card network, who in turn, contacts the issuer. Issuer verifies the payer’s identity and authenticates the payment.
Authorization is the approval that issuer grants for a successful payment. After authentication, the issuer verifies if the payer has sufficient balance to honor the payment. This authorizes the payment, and transmits a response to the card network, who in turn, contacts the acquirer with instructions on how to proceed with the payment.
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