The use of credit cards has become very prominent in the modern world. This is because of the fact that they are very convenient since you do not actually need to have cash on hand for you to make purchases. On top of that, you can also pay for a product or service through the Internet with a credit card. As a user, you should be aware of how the transaction takes place. If you understand this, then you are armed with the knowledge that you need if and when problems arise with your card. Read on below to understand the parties involved and the two-part process of payment collection; namely, Clearing and Settlement.
Parties
When using a credit or debit card, there are five parties involved. First of all is the cardholder or the consumer who is about to make the purchase. Then, you have the merchant or the entity about to make the sale of a product or provide service for the customer. Then you have the card issuer of the cardholder, which is the company who initially shoulders the cost. You have the acquirer or bank which receives the payment on behalf of the merchant. Last, you have the card Association which dictates the terms and conditions for transactions such as fees, obligations and others. The actual exchange of funds, known as settlement, happens between the card issuer and acquiring bank.
The First Step
The first part of the exchange is clearing. This is a process wherein the acquirer and issuer exchange information about their respective clients and the sale about to be made. During this part, no money is transferred yet. It involves only data in order to ensure that the transaction is safe, secure and authentic. This is done in order to protect all parties involved within the transaction, including the two financial institutions. Data sent include names of the clients, available credit balance, purpose of the payment, and more. After all the data and information checks out and both parties are satisfied, the transaction would now push through with the next step, which is known as settlement.
Second and Last Step
The second step is known as settlement. As noted earlier, this involves the actual transfer of money from the card issuer to the acquirer. Along with this, they also send a record of the transfer. The acquirer would then use this to pay off the merchant. This process is done through the Federal Reserve System.
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