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Introduction to Electronic Processing

Introduction to Electronic Processing. College of General Studies. Agenda. Industry overview Consumer products Players - roles & responsibilities “A Day in the Life of a Transaction” Seven stages of processing. Visa. Other General Purpose Cards. 12.1%. 10.0%. Checks 48.7%.

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Introduction to Electronic Processing

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  1. Introduction toElectronic Processing College of General Studies

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

  3. Visa Other GeneralPurposeCards 12.1% 10.0% Checks48.7% OtherCards 4.6% 8.7% Other* Cash16.0% Personal Consumption $4.7 Trillion $7.0 Trillion $8.3 Trillion OtherGeneralPurposeCards Visa Visa 6.0% Other GeneralPurposeCards OtherCards 13.9% 6.6% 5.9% 11.0% Other* 5.3% Checks57.6% Checks45.4% OtherCards 5.8% Cash18.6% 8.9% Cash15.0% Other* 1994 2001 2003 *Money Orders, TCs, Food Stamps, Preauth and Remote PaymentsSource: BEA, Nilson Report, and Visa Estimates

  4. Consumer Products - Payment • Credit cards • Classic • Commercial • Proprietary • Debit cards • Classic • Gift • EBT • Checks

  5. Consumer Products - Marketing/Value Add • Loyalty/frequency • Smart cards/chip cards • Contactless • Wireless • Radio frequency

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

  7. Credit 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 Credit Cards vs. Debit Cards

  8. 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

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

  10. Cardholder Contract with Issuer Buys goods/services Cardholder promises to pay Issuer Merchant Contract with Acquirer Sells goods/services Acquirer promises to pay Merchant Cardholder vs. Merchant

  11. Issuer 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 Issuer vs. Acquirer

  12. V/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 Visa/MasterCard vs. Other Cards

  13. Processors Acquirers Merchants Merchants Merchants Merchants MLS MLS Hierarchy of Players Visa/MasterCard Associations Debit Card Networks ISO/MSP

  14. 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

  15. 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

  16. 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

  17. 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

  18. 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

  19. Front-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 Front-End vs. Back-End Processors

  20. “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

  21. Seven Stages of Processing 1 - Authorization 2 - Merchant Balancing 3 - Capture 4 - Clearing 5 - Interchange 6 - Settlement 7 - Merchant ACH

  22. 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

  23. Authorization 1 Merchant Issuer Cardholder Front-EndProcessor Visa Base I/MasterCard Authorization Flow MakesPurchase Authorization Authorization Merchant Reduces CardholderOpen to Buy

  24. 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

  25. 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)

  26. 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

  27. 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

  28. 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

  29. 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

  30. MerchantBalancing 2 Merchant ACH Settlement 7 6 Settlement ACH V/MC Acquirer 6 Merchant Clearing 4 Front-EndProcessor Back-EndProcessor Capture 3 Visa/MasterCardInterchange 5 Visa/MasterCard Data Other Card Data $$$ Flow Interchange Issuer Transaction Processing Flow OR

  31. Authorization 1 Merchant ACH 4 ACH Debit Card Acquirer Merchant Front-EndProcessor Capture 2 Debit CardNetworks 3 Settlement Issuer Pin Based Debit Processing Flow

  32. Summary • Basic definition and terminology • Players and their roles and responsibilities • Seven stages of processing • “A Day in the Life of a Transaction”

  33. Introduction toElectronic Processing College of General Studies

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