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Like most consumers, you probably take your credit and debit card transactions for granted. You and others like you carry millions of cards and use them billions of times annually. But unless a transaction goes awry, you rarely think about how your cards work. In fact, a great deal happens after you produce your card to pay for a purchase and before the merchant receives funds and you receive your bill.
What happens during the few seconds between the time you swipe your card and the terminal flashes a result? How does that swipe translate into a line on your bill from the institution that issued the card? When making a purchase using a card online or over the telephone, why are you sometimes asked for the three- or four-digit number printed on the back of the card, the card's expiration date, or arcane information such as your mother's maiden name?
From the merchant's perspective, how is that same card swipe turned into cash to pay for the goods or services provided? Why does a merchant pay a larger fee when it accepts a card in some circumstances than it does in others? And why was the representative from the payment card company so interested in the merchant's personal information before the merchant was even permitted to accept cards?
This article answers such questions. It explains how the card network signs up merchants to accept payment cards and how the sales slips that consumers sign are converted into cash for the merchants. The discussion begins with an explanation of the simplest type of card transaction-one using a private-label card (one that is accepted by only one merchant)-but the focus is primarily on the Visa and MasterCard networks in the United States. The major aspects of payment cards are similar in other countries, although details may differ, especially for cards other than Visa and MasterCard. The key institutions in this transactions process are the merchant acquirer and the payment card processor. The largest of these often perform both functions. Together, merchant acquirers and processors serve as the communications and transactions link between the merchants and the card issuers.
Merchant acquirers and card processors are important for several reasons. First, every card issuer deals with at least...