Payment systems based on Bank cards

The General principles of functioning of the payment system

The main purpose of a payment system based on payment cards is to perform payments between the service/product supplier (seller) and the consumer of the service/product (buyer) who presented the payment card for payment. However, it is important to emphasize that these payments are made in non-cash form.
In addition, the payment system ensures that the cardholder receives cash both on special devices-ATMs, and in operational cash desks that provide such services.
in the most General form, the infrastructure that supports working with payment cards. The Central administrative authority provides overall management of the payment system both in terms of current activities and in terms of system development, namely:
defines and develops a unified concept for building a payment system;
supports the organizational and legal framework of the payment system-develops and modifies a set of rules, regulations, and other regulatory documents for system participants;
organizes technical and technological support of the payment system – development and modification of requirements for information carriers and processing devices, for protocols of interaction of technical means, provides implementation of new technical and technological solutions;
selects promising areas for the development of the payment system’s business – preparing new and modifying existing card products, developing Agency programs, expanding the number of participants and increasing the payment system’s customer base;
performs monitoring and audit of the system participants ‘ activities, certification of participants for compliance with the accepted rules and requirements of the payment system;
conducts arbitration of conflict situations, imposes sanctions for violations of the payment system rules.
The Issuer in this case (since payment cards are considered) is a credit institution – a Bank. The main task of the Issuer is to provide customer service to cardholders, namely:
registration and maintenance of dossiers of cardholders (clients);
issuing and maintaining cards for clients – personalization, reissue, blocking transactions, etc.
opening of special card accounts of clients, where the movement of funds is managed by clients using cards;
maintaining a special card account in accordance with the terms of agreements – accrual of Deposit interest, write-off of interest when using a credit scheme, Deposit / write-off of funds for operations not related to cards;
card operations – processing authorization requests received from card acceptance points via the processing center, debiting from a special card account and transferring funds to the seller, and returning funds to a special card account in case the cardholder refuses the product/service;
analysis of conflict situations in accordance with the established rules of the payment system;
technological interaction with the processing center.
The acquirer provides crediting of funds to trade and service companies for transactions that are paid for using a payment card, and also serves cash collection points upon presentation of the card. Here is a typical list of functions of the acquiring Bank:
registration and maintenance of card acceptance points in your accounting system;
registration of card acceptance points in the processing center;
maintaining Bank accounts of trade and service enterprises in accordance with the terms of agreements – accrual of Deposit interest, crediting funds received from the Issuer for card operations, debiting and returning funds to the Issuer in cases of refusal to pay for goods/services, debiting service fees, etc.;
servicing ATMs and other cash collection points;
analysis of conflict situations in accordance with the established rules of the payment system;
technological interaction with the processing center. The main role in information technology interaction
a processing center plays between all participants of the payment system, which:
registers issuers and acquirers;
keeps stop lists with payment card numbers, operations on which are prohibited for various reasons, and checks the stop lists of all transactions that pass through the processing center;
routes authorization requests from payment card acceptance points to issuers;
receives files of financial confirmations from acquirers for completed transactions and sends them to issuers for mutual settlements;
participates in the analysis of conflict situations in accordance with the established rules of the payment system.

Retail and service companies (merchants) are companies that accept cards as a payment instrument for payments for goods/services sold to cardholders. In terms of operations with cards, the functions of such enterprises are as follows:
customer service – receiving and controlling the card from the customer, creating an authorization request for the amount of the paid product/service, performing other technological operations;
organizational and technological interaction with the processing center and the acquirer;
analysis of conflict situations in accordance with the established rules of the payment system.
Cash points – the structural unit of aquirers (cash Desk of the credit organization, cash Desk of branch of the credit organization, cash office of the credit organization, operational cash Desk out of cash knot of the credit organization, exchange office, ATMs, etc.) issuing the cash on payment cards.
Cardholders are individuals, clients of the issuing Bank, who received payment cards from it on the basis of concluded agreements (contracts). In this case, it is stipulated that the card itself is the property of the Issuer, and the card holder does not have the right to transfer it to a third party and is obliged to keep the card PIN code secret.

There are contractual relations between all participants of the payment system. the details of interaction are defined in the relevant regulations and rules of the system, and there are clauses in the contracts on the obligation to comply with these regulations and rules.
It can be noted that the figure shown in Fig. 1 the scheme involves making payments outside the payment system in any available way. For example, when the Issuer receives information from the payment system about card transactions performed by its clients, it debits funds from a special card account and transfers them to the Bank details of the recipient – the card acceptance point. Or the acquirer issues a payment request to the Issuer. To reduce the time of payments and increase their guarantee, almost any payment system currently has its own settlement Bank associated with the processing center. The settlement Bank of the payment system establishes correspondent relations with issuers and acquirers, maintains their accounts and transfers funds between them based on information received from the processing center about operations on the payment card. Thus, the settlement time can be reduced to one or two banking days.

In addition, most processing centers provide services for maintaining payment limits of issuers ‘ cards directly in the processing center’s accounting system. This technique allows you to get rid of routing the authorization request to the Issuer, which significantly improves the system’s performance and reliability (which is especially important for online authorization).

The principles of functioning of the payment system can be considered on the example of servicing such a client by a trade and service enterprise, tracing the sequence of actions, as well as the movement of information and cash flows between the system participants.
After calculating the cost of goods/services, the customer presents their payment card to the cashier.
The cashier verifies that the card belongs to the customer, for example, by using a sample signature on it or a photo of the holder placed on the card.

The cashier forms an authorization request to the processing center. As a rule, now all retail outlets are equipped with special devices-POS-terminals that read information from the card and automatically send an electronic file of the desired format to the processing center. The cashier only pays the amount of the payment.
The processing center, after receiving an authorization request, checks the availability of the card in the stop lists, determines the Issuer by the card number and sends this request to him.

After receiving the authorization request, the Issuer also checks the customer’s ability to pay using the card, blocks the amount specified in the request on the card account, and provides authorization confirmation. If the checks did not give a positive result (for example, the required amount is not currently on the card account, and the credit limit has been reached), the processing center returns the authorization refusal with the reason.

The processing center receives a response from the Issuer and sends it to the POS terminal. When authorization is confirmed, the terminal prints two copies of the receipt, which are signed by the cardholder, and one copy is passed to the client.
At the end of the day on the POS terminal is formed in the activity log for a day (shift) to file financial confirmation of transactions to pay for goods using the card, which is sent to the processing center and aquirer.

The processing center, after receiving the financial confirmation file, sorts it by Issuer and sends each Issuer the part of it that contains the card numbers of this Issuer. At the same time, the processing center transmits the financial confirmation file to the settlement Bank and the acquiring Bank.
The Issuer, having received financial confirmation from the processing center, removes the block from special card accounts for those cards whose numbers are present in the file, debits the specified amounts from these card accounts and transfers them to the settlement Bank for crediting to its account.
Based on the received financial confirmation file, the settlement Bank debits funds from the issuers ‘ accounts and deposits them to the acquirer’s account.

The acquirer, having received a statement on his account in the settlement Bank, transfers funds to the account of the company through whose POS-terminal the card payment operation was performed.
The Issuer, according to the rules stipulated in the service agreement (usually once a month), provides the payment card holder with a statement on their special card account with a list of all operations for the specified period.
The above sequence describes the card payment procedure and the interaction of the payment system participants for the most common case of using a card with a magnetic stripe in retail outlets equipped with POS-terminals. Payment system technologies also provide for other types of card transactions, both technological (embossing, personalization, etc.) and client-based.

Among the latter, first of all, operations using ATMs should be noted : cash withdrawal, requesting the balance on a special card account, and payment for certain types of services, such as mobile operators. The main difference from the scheme described above is the fully automated interaction of the cardholder with the rest of the system participants. In this case, the cardholder is identified by the PIN code entered by them.
Modern payment systems support payment schemes without online authorization.
in some cases, this is economically advantageous. So, for example, the author of these lines was quite surprised when, when paying for an entrance ticket to the web design exhibition in London in 2001, the his corporate card was “rolled” in the imprinter. And almost a month after returning from a business trip, an email came from the exhibition Manager asking why the issuing Bank refused to pay. When analyzing the situation it became clear that, while a slip from the imprinter was encashed by the acquirer and forwarded to the processor, an acquirer, and processed there as a file for financial support through the regional processing center have been delivered to the Issuer, the credit limit on your special card account corporate card was canceled because the client has returned from a business trip! We had to restore the limit and re-conduct the payment transaction. As a rule, in such cases, “voice” authorization is provided, but due to the complexity of its implementation (it is not always easy to reach the Issuer) it is performed when a certain threshold value of the payment amount (floor-limit) is exceeded, which is often called the authorization limit. The economic benefit here is obvious: the imprinter is a cheap device that can be easily transferred to any place, does not require connection to a communication network, and the rules of the payment system (in this case, it was Visa) ensure guaranteed receipt of payments. The relative delay in the actual receipt of funds, obviously, did not particularly concern the organizers of the exhibition.

Using smart cards as a payment tool brings its own features to the payment system technologies, significantly expanding their functionality and attractiveness to customers.
The most important element of protecting the rights of cardholders in any payment system is the implementation of the mechanism of refusal of the holder from payment or chargeback (chargeback).

The reasons for the occurrence of “chargeback” situations can be both technical failures (which is quite rare at the current level of reliability), as well as errors and dishonesty of the service personnel of the card acceptance points. To increase the responsibility of participants in the payment system, in some cases, penalties are provided against both unscrupulous sellers and unscrupulous buyers. As a rule, a kind of “Statute of limitations” is established from the moment of payment, after which applications for refusal are not accepted for consideration. In the rules of various payment systems and various types of transactions (e-Commerce, hotel services, payment in supermarkets), this period varies widely, with a maximum of 180 calendar days.
The refund operation is often used for the cardholder. The operation is performed in a situation where the buyer and seller have identified the fact of excessive deduction of funds from the buyer (overpayment) directly when making a purchase, but after the authorization and financial confirmation procedure. In this case, the refund operation can also be performed using a POS terminal, the financial result of the operation is similar to a chargeback operation – funds are debited from the seller’s account and credited to the buyer’s account (a special card account of the card holder).
All of the above describes the functioning of the payment system and the performance of certain operations with payment cards in the most General terms. As noted above, any payment system has its own set of rules, regulations, and standards that specify in detail all the activities of the system participants up to the protocols of interaction of technical means. These descriptions make up many volumes of technical and organizational documentation.