Card payments are everywhere, from your morning coffee purchase to online shopping. But have you ever wondered what happens behind the scenes when you tap, swipe, or enter your card details? Understanding how card payments work is essential, whether you’re a business owner, a financial professional, or just someone curious about payment systems.
In this post, we’ll break down the fundamentals of card payments, from authorization to settlement, in a way that’s easy to understand.
How Card Payments Work
A typical card payment goes through five key stages:
- Initiation – A customer presents a card (physical or digital) to a merchant.
- Authorization – The transaction request is sent to the bank or payment gateway.
- Authentication (for online payments) – The user may need to confirm the transaction using 3D Secure (OTP, fingerprint, etc.).
- Clearing & Settlement – Funds are moved from the customer’s bank to the merchant.
- Reconciliation – The merchant and acquirer verify that the transactions match up.
Let’s break these down with real-world relevance.
Step 1: Transaction Initiation
Every card payment starts with a transaction request. This can happen in different ways:
- In-store: A card is tapped, inserted (EMV chip), or swiped.
- Online: A customer enters their card details on a secure checkout page.
- Mobile Payments: Digital wallets like Apple Pay or Google Pay initiate the transaction.
Regardless of how it’s done, the transaction details are securely passed to the next step.
Step 2: Authorization
Once a transaction is initiated, it needs to be authorized. This is where the cardholder’s bank (issuer) checks if the transaction can proceed.
How Does It Work?
- The merchant sends transaction details to their Acquirer or Payment Processor like PayMongo, Stripe, or VeritasPay. If via Payment Processor, the Payment Processor send the transaction request to the Acquirer.
- The Acquirer forwards it to the Card Network (Visa, Mastercard, etc.)
- The Issuer Bank (customer’s bank) checks if the card is valid and if there are enough funds.
- The bank approves or declines the transaction, sending a response back.
This all happens in real-time, usually within seconds!
Step 3: Authentication (3D Secure)
For online transactions, an extra layer of security may be required. This is known as 3D Secure (3DS) and is used to prevent fraud.
You may have seen this when making online payments—your bank sends an OTP (One-Time Password) or asks for biometric verification. This is especially important for reducing fraud and chargebacks.
Step 4: Clearing & Settlement
Just because a transaction was authorized doesn’t mean the money has moved yet. The actual movement of funds happens during settlement.
- The acquirer submits all transactions to the Card Networks (Visa, Mastercard, etc.) in batches.
- The Issuer Bank deducts the amount from the customer’s account and transfers it to the merchant’s acquirer.
- The Acquirer then pays the merchant, minus any processing fees.
Settlement timelines vary—some transactions settle the same day, while others take a few business days.
Step 5: Reconciliation
This final step ensures that everything adds up. Merchants and acquirers reconcile their transaction records to confirm that the correct payments were received.
- Discrepancies? Chargebacks, refunds, or settlement issues may be the cause.
- Reporting tools help businesses track their payments and identify any missing funds.
Common Challenges in Card Payments
- Declined Transactions – A transaction may be declined due to insufficient funds, incorrect details, or security concerns.
- Chargebacks & Fraud – Fraud prevention tools such as 3D Secure, Address Verification (AVS), and real-time risk analysis help minimize risks.
- Settlement Delays – Proper transaction batching and reporting help ensure timely settlement.
Card payments power the modern economy, but behind every simple tap or click, there’s a complex system ensuring that transactions are secure and funds reach the right hands.
Understanding these fundamentals is crucial whether you’re a business owner, working in payments, or simply curious about how your transactions work.
