Page 94 - DCOM208_BANKING_THEORY_AND_PRACTICE

Unit 6: Type of Deposit Account

4. Acquiring bank: The financial institution which accepts the payment for the products or Notes
services on behalf of the merchant.
5. Independent sales organization: Resellers (to merchants) of the services of the acquiring
bank.
6. Merchant account: This refers to the organization that the merchant deals with.
7. Credit Card association: An association of card-issuing banks such as Visa, MasterCard,
American Express, etc. that set transaction terms for merchants, card-issuing banks, and
acquiring banks.

8. Transaction network: The system that enforces the mechanism of the electronic transactions.
It may be operated by an independent company, and one company may operate multiple
networks.
9. Affinity partner: Some institutions lend their names to an issuer to attract customers that
have a strong relationship with that institution, and get paid a fee or a percentage of the
balance for each card issued using their name. For example, sports teams, universities,
charities, professional organizations, and major retailers.

Credit Card Transaction Process

Once a credit card is used, a number of processes take place to complete its transactions.

1. Authorization: For making the payment the credit card holder makes purchases and
swipes the card. The merchant submits the transaction to the acquirer (acquiring bank)
and the acquirer verifies the credit card number of the holder and the transaction type.
Authorization process generates an approval code which the merchant keeps secured as
official record of the transaction.
2. Batching: Batching refers to keeping of the entire day’s transactions together or in ‘batches’
before they are sent to the acquirer. These ‘batches’ are scheduled for submission at the
end of business day. Clearance of those transactions which do not become part of the batch
stays valid only for a period of time which is determined by the issuer. After the expiry of
this time period the amount is returned to the credit card from where it was debited.
Transactions that are submitted in the batch without prior authorizations can be those
transactions that fall under the merchant’s floor limit.
3. Clearing and Settlement: The clearing and settlement process begins with the merchant
requesting to the acquirer for final transfer of transaction batch. This request is imparted
through the credit card association which leads to the transfer of money from the customer’s
account to the merchant’s account. The transaction charges are basically imposed to the
account of the issuer.
4. Funding: Once the money reaches the acquirer, the amount is transferred from the acquirer
account to the merchant’s account. The merchant receives the amount from the acquirer
after deduction of the transaction fee, popularly known as ‘discount rate’. This is the fees
that the merchant pays to the acquirer for processing the transaction.
5. Charge backs: In case of a dispute arising out of a transaction, chargeback comes into play.
A chargeback is an event in which a purchase payment in a merchant account is held back
due to a dispute relating to the transaction. Charge backs are mainly initiated by the
cardholder. The issuer, in the event of a chargeback, returns the transaction to the acquirer
for resolving the dispute. The acquirer, in turn, sends the chargeback to the merchant. The
merchant then has the freedom of either accepting the chargeback or advocate it.

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