Does your business acceptcreditcard payments?If so, are you familiar withthe credit card life cycleand howyou can manage it?Indeed, this should be a seamless, quick process for customers purchasing your products or services. Behind the scenes, this paymentprocess is complex, requiresmultipleplayers, and involvesvarioussteps andfees.Continue reading to discover everything you need to know about the credit card life cycle.
What Is the Credit Card Life Cycle?
The credit card life cycle refers to theprocess that allows merchants to accept and process credit card payments from customers that purchase their products or services.While eachtransaction is unique, every credit cardtransaction follows specific steps, which will be discussed in this article.
Who Are the Key Players?
- Customers –The customer(or cardholder) is the personwho uses their credit card to pay for a product or service offered by a merchant.Theycanprovidecardholder data in two ways –card-present (POS terminals) or card-not-present (via phone, mail, or online).Once the cardholder places an order,the transaction details are sent to their financial institutionas apending credit charge.
- Merchants – Merchants are any business, corporation, entrepreneur,orsole proprietorthat accepts and processes card payments in exchange for theirproducts and services forsale.Indeed, merchants offerpayment acceptance tools necessary for customers to make purchases. This can include a card terminal, point-of-sale (POS) terminal or card-present transactions,payment gateway for online orders, or other payment applications.
- Issuer – The issuer orissuing bank refers to the financial institution thatoffers credit cards to the cardholder.Issuersconnectcustomers totheir bank accountsand handlethe process ofauthorizing and sending funds to merchants.This funding process is crucial for businesses receiving payments from customers.
- Acquirer – The acquirer or acquiring bank is the financial institution that creates and maintains merchant bank accounts. Any business that accepts and processes credit card payments must use a merchant account or sub-merchant account. When a customer purchases anitem or service, merchant banks send these transaction requestsandauthentication details between businesses and their card associations.
- Card Associations – Card associations, such asAmerican Express, Discover, MasterCard, and Visa, connectcustomers, businesses, issuing banks, and acquiring banks. These associationscontrol the credit card paymentprocess,includingestablishing interchange rates,handling card disputes between cardholderbanksand merchant banks, andencouraging secure, fast, and seamless payment processing.
- Payment Processors – Payment processorsrefer to businesses that process credit card transactions for merchantsand their acquiring banks.The credit card life cycle would not be possible without these vital processors. Aside from processing payments, processorshave expanded to offer additional functionality designed to improve thepayment experience for customers.
TheCredit CardLife CycleProcess
Likethefour primarymoon phasesare a part of the circle oflife, there are foursignificantsteps involved in any credit card life cycle, no matter what type of transactionhas beenprocessed. This includespaymentauthorization, batching, clearing, and settlement.
Payment Authorization
While it may seem like a quick, easyprocess,several steps arehappeningin the backgroundduring the first stage of the card life cycle.Payment authorization, which takes place within a few seconds,begins once a customerprovides their credit card details to a business either as card-present or card-not-present.The cardholder information is securelytransferred to the acquiring bank and the payment processor.Then, the transaction details are sent to the card brand andissuing bank.
Oncethe issuer has verified that the cardholder has enough funds or credit to pay for the pending transaction,anauthorization response code will be sent to the card association. The card brand willsend this code to the acquiring bank,informingthe merchant whether the transaction is approved ordeclined.Keep in mind that this initial stage will alsoinclude anti-fraud prevention measures to ensure that the transaction islegitimate.
Batching
The second stageof the credit card life cycle is batching, which is when merchantsreview and submit batches oftransactions.Indeed, these transactions are pending until the business owner submits afinalized,completereport of each submittedtransaction.How often merchantsdobatchingvaries based on the type of business. Some businessesoffertransactions at the end of each business day, while others may send them at the end of theweek.
A major benefit of batching is the cost-saving opportunities.Merchantscan eithersubmit transactions manually, which is time-consuming or automatically. If an automated option is chosen, merchants can easily set this upwith their acquiring bank or payment processor.
Clearing
After the merchant has submitted a batch of transactions, these transactions are sent to various entities. Initially, the acquiring bank will receive the transactions and send them to the payment processor, card network, and finally, the issuing bank. Once the issuing bank receives the batch, they will then deduct the authorized transactional amount from the cardholder’s credit account.
Furthermore,this is the stage in whichinterchange feesare charged.The issuing bank charges these fees to cover the cost ofprocessingcredit card transactions.Issuing banks will share theseinterchange fundswith the card associations.Indeed, the merchant must pay these non-negotiable fees, which vary based on which card associationand card typeareused.
Settlement
The final stage of the credit card life cycle is settlement,which iswhen the businessis paid. In this stage, the issuing bank sends the approvedtransactional funds to the merchant bank. Once received, the merchant bank will deposit the money into the merchant’s account.To no surprise,businesses depend on a quick and efficient card life cycle to receivetimelypaymentsin exchange for the products and services they provide. Indeed,a steady cash flow is imperative for sustainable growth and maintaining business operations.
How to Managethe Credit Card Life Cycle
When youmanagecredit card payments, the reality is thatthis carries risks for your business. Risksassociated with the card life cycleinclude chargebacks, credit card fraud,high interchange rates, andeven losing your merchant account.Whilemost card transactions are legitimate,the Federal Trade Commission indicates there were more than 390,000 reportsofcredit card fraudinjust2020. Indeed, credit card fraud is the most common type ofpayment fraud, as criminals do not need to be physically present to makeunauthorized purchases.This makes itreasonably easy to use a stolen cardto pay for a product or service over the phone, online, or by mail.
Additionally, transactions may be authorized by banks but not by the cardholder. If this happens, merchants will receive chargeback fees, which means they will lose money and have to provide evidence that the charge was authorized. In most cases, the cardholder wins and receives their money back, whether the transaction was legit or not. If the merchant receives too many chargeback fees, they may receive higher chargeback and interchange rates and lose their merchant account. This will require looking for a high-risk account, which will cost a business even more money and damage their reputation as a merchant with a low risk for credit card fraud.
Tips for Managing Credit Card Risks
- Limit manually keyed-in transactions–Since manually keyed-in transactions throughthemail and phone callshave a high fraud risk, try to limit or avoid the numberofthis type oftransaction.
- Offer online/phone reservations with pay in-store–If possible, allow customers to make reservations ahead of time,either online or over the phone. Then, have them pickup and pay in-store. These card-present transactions have the lowest fraud riskas it’s morechallengingto commit credit card fraudby being in person.
- Provide as much data as possiblefor credit cards – To reducecard fraud, merchants should provide as much cardholder data as possible. There are three different data levels,so the type of business will determine which level is needed.Level 1 examples includePAN, billing ZIP code, and CVV,level 2provides customer code, level 1 data, and sales tax amount, and level 3 includes discounts, shipping costs, and level 1 and 2 data.
- Settlebatchingdaily–It’s recommended that merchants settle their card transactions at the end of each business day. This helps ensure that transactions are classified under the correct interchange programs, thus avoiding a business paying too much for the wrong program.
- Use fraud prevention tools –Fraud prevention solutions like3-D Securecan help reduce the risk of fraud by authenticating cardholders before a transaction is processed. Additionally,network tokenizationis apayment network service that tokenizes cardholder data.
Final Points
As you can see, the credit card life cycle consists of several stages that work together to approve or deny transactions. It’s crazy to think that the authorizationstage only takes a few seconds, which is necessary for today’s businesses tooperate quickly and efficiently.Since credit card fraud will continue to be a pressing issue, merchants must prioritizeprotecting and securing cardholder data.After all,today’s cybercriminals keep the pulse offinancialtrends across industries, allowing them to easilytarget cardholders with fraud, identity theft,phishing,and more.One of many solutions is partnering with a trusted tokenization provider dedicated to protecting your most sensitive paymentdata,such asyour customers’primary account numbers, card verification values, and more. ContactTokenExtodayto learn how we can help you meet PCI compliance, reducecredit card fraud, and maintain vitalbusiness operations.
