Download Back-End - Performance Merchant Services

Introduction to
Electronic Processing
College of General Studies
Agenda
Agenda
Industry overview
 Consumer products
 Players - roles & responsibilities
 “A Day in the Life of a Transaction”
 Seven stages of processing
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Personal Consumption
$4.7 Trillion
Visa
$7.0 Trillion
Other
General
Purpose
Cards
6.0%
6.6%
5.9%
Visa
Other
Cards
5.3%
Checks
57.6%
Cash
18.6%
Other*
Visa
12.1%
10.0%
Checks
48.7%
1994
*Money Orders, TCs, Food Stamps, Preauth and Remote Payments
Source: BEA, Nilson Report, and Visa Estimates
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$8.3 Trillion
Other
General
Purpose
Cards
4.6%
8.7%
Cash
16.0%
2001
Other
Cards
Other*
Other
General
Purpose
Cards
13.9%
11.0%
Checks
45.4%
5.8%
Cash
15.0%
2003
Other
Cards
8.9%
Other*
Consumer Products - Payment
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Credit cards
– Classic
– Commercial
– Proprietary
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Debit cards
– Classic
– Gift
– EBT
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Checks
Consumer Products - Marketing/Value
Add
Loyalty/frequency
 Smart cards/chip cards
 Contactless
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– Wireless
– Radio frequency
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Consumer Products - Authentication
Personal Identification Number (PIN)
 Smart cards/chip cards
 Biometrics
 Age verification
 Address Verification
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Credit Cards vs. Debit Cards
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Credit
Credit balance
“open to buy”
Promise to pay
Bank Loan
Billed monthly
Signature required
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Debit
Checking/savings
account balance
Reserved funds
Consumer owned
Subtracted daily
PIN or signature
required
Key Debit Statistics
Nearly 140 million Visa check
cardholders
 Over $400 billion in annual volume
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– 7 billion annual transactions
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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
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On-Line (PIN) vs. Off-Line (Signature)
Debit
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On-Line
Guaranteed funds
PIN-based
Posting at time of
authorization
Regional debit
network rules
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Off-Line
Reserved funds
Signature-based
Authorization, clearing,
then posting
Visa/MC rules
Cardholder vs. Merchant
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Cardholder
Contract with Issuer
Buys goods/services
Cardholder promises
to pay Issuer
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Merchant
Contract with Acquirer
Sells goods/services
Acquirer promises to
pay Merchant
Issuer vs. Acquirer
Issuer
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Contract with Consumer
Card issuance
Issues authentication and
authorization
Pays Association (V/MC)
Reimbursed by
Cardholder
Bills fees to Cardholder
Issuing BIN/ICA
Acquirer
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Contract with Merchant
Card acceptance
Requests authentication
and authorization
Pays Merchant
Reimbursed by
Association (V/MC)
Bills fees to Merchant
Acquiring BIN/ICA
Visa/MasterCard vs. Other Cards
V/MC = Association
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VISA and MasterCard
Visa not for profit
Membership-based
Network of Issuers
and Acquirers
Interchange system
Funds flow between
Issuers and Acquirers
Other = Independent
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Amex, Discover, JCB
For profit
Wholly-owned
Single Issuer and
Acquirer
Closed-loop system
Funds flow between
Consumers and
Merchants
Hierarchy of Players
Visa/MasterCard Associations
Debit Card Networks
Acquirers
ISO/
MSP
Merchants
MLS
Merchants
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MLS
Merchants
Merchants
Processors
Roles and Responsibilities
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Visa and MasterCard Associations/Debit
Card Networks
– Provides infrastructure for Interchange,
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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
Roles and Responsibilities
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Acquirer
– The Association/Debit Card Network
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–
–
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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
Acquirer
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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
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Roles and Responsibilities
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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
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Roles and Responsibilities
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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
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Front-End vs. Back-End Processors
Front-End
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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
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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
“A Day in the Life of a Transaction”
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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
Seven Stages of Processing
1 - Authorization
2 - Merchant Balancing
3 - Capture
4 - Clearing
5 - Interchange
6 - Settlement
7 - Merchant ACH
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1 - Authorization
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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
Authorization Flow
1
Makes
Purchase
Cardholder
Authorization
Authorization
Authorization
Merchant
Merchant
Front-End
Processor
Visa Base I/
MasterCard
Reduces Cardholder
Open to Buy
Issuer
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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
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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)
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4 - Clearing
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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
5 - Interchange (Visa and MC only)
Associations pick up files from BackEnd 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 the
Issuer to pick up
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6 - Settlement
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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
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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
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Transaction Processing Flow
Merchant
Balancing
2
7
Merchant
Merchant ACH
ACH
6
4
Front-End
Processor
3
Back-End
Processor
Capture
Visa/MasterCard Data
Visa/MasterCard
Interchange
Other Card Data
$$$ Flow
Issuer
5
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Settlement
V/MC Acquirer
Settlement
OR
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Interchange
Clearing
Pin Based Debit Processing Flow
1
Authorization
4
Merchant ACH
Merchant
ACH
Front-End
Processor
2
Capture
Debit Card
Networks
Issuer
3
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Settlement
Debit Card Acquirer
Summary
Basic definition and terminology
 Players and their roles and
responsibilities
 Seven stages of processing
 “A Day in the Life of a Transaction”

32
Introduction to
Electronic Processing
College of General Studies