Credit and debit card transactions

Credit and debit card transactions involve an even longer list of intermediaries. In addition to the payer's and payee's banks (where they hold accounts), there are a bunch of other payment processors on both sides, and the Visa or Mastercard network in the middle. Visa and Mastercard hold huge market power in this value chain, and this is easy to see in their profit margins. Everyone can check that out in their financial accounts, as they are publicly listed companies.

A basic credit or debit card transaction involves the following steps:

1. A consumer initiates a payment at the point of sale (POS) to a merchant or retailer. This is done via a POS terminal (if in a store) or via a website (if online).
2. The merchant then transmits the sales data to a merchant acquirer. The merchant acquirer can be the bank where the merchant holds an account, or another payment processor. Many banks participating in card schemes outsource this part, which is basically a back-office function, to external providers.

1. The merchant acquirer routes the transaction request data through a card network, such as Visa or Mastercard.
2. The card network sends the transaction request data to the card issuing bank.
3. The card issuing bank remits the funds back through the card payment network.
4. The card payment network passes on the funds to the merchant acquirer.
5. Finally, the merchant acquirer credits the merchant's deposit bank account.
6. Needless to say, all of the intermediaries involved in the process get paid substantial fees for passing the money on through the system.

This system can be summarized with the following diagram:

This process can involve more steps if banks on both sides decide to outsource more of the back-office transaction processing to third-party intermediaries. The whole cycle can, in theory, be completed in 12 hours, but it typically takes 3 to 4 days, depending on the individual contractual agreements between the various intermediaries involved.