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3.1 - Understand the Industry

3.1.1 - Explain the money flow and the information flow in the acquirer market and the role of the main players.

Money Flow:

  1. Customer: Initiates a purchase at a merchant (online or in-store) using a payment card (credit/debit).
  2. Merchant: Processes the transaction through a Point of Sale (POS) terminal or online payment gateway.
  3. Acquirer: Receives the transaction request from the merchant and forwards it to the card network (Visa, Mastercard, etc.).
  4. Card Network: Routes the request to the issuer (customer's bank).
  5. Issuer: Approves or declines the transaction based on the customer's available funds and risk assessment.
  6. Card Network: Relays the authorization response back to the acquirer.
  7. Acquirer: Notifies the merchant of the authorization status.
  8. Merchant: Completes the transaction and provides goods or services.
  9. Acquirer: Deposits the transaction amount (minus fees) into the merchant's bank account.

Information Flow:

The information flow mirrors the money flow but involves transmitting data about the transaction, including:

1. Customer ↔ Merchant

  • Customer to Merchant:

    • Purchase information: Items purchased, quantities, total amount.
    • Shipping address (if applicable)
    • Payment information: This might be directly entered by the customer (online) or read from the card by a POS terminal.

  • Merchant to Customer:

    • Transaction confirmation: Includes order details, confirmation number, etc.
    • Receipt: Electronic or physical, proving the purchase.
    • Updates: Shipping notifications, potential delays, etc.

2. Merchant ↔ Payment Gateway

  • Merchant to Payment Gateway:

    • Transaction request: Encrypted card data, transaction amount, merchant ID.
    • Additional data: Billing address (for fraud checks), customer IP address, etc.

  • Payment Gateway to Merchant:

    • Transaction response: Approval/decline status, transaction ID, authorization code (if approved).
    • Error messages: In case of processing issues.

3. Payment Gateway ↔ Acquirer

  • Payment Gateway to Acquirer:

    • Forwards the transaction request: This includes the encrypted card data and other details received from the merchant.

  • Acquirer to Payment Gateway:

    • Forwards the authorization response: This comes from the card network (after checking with the issuer) and tells the gateway if the payment was approved or not.

4. Acquirer ↔ Card Network

  • Acquirer to Card Network:

    • Authorization request: Includes merchant ID, transaction amount, and encrypted card data. The network uses this to identify the issuer and route the request.

  • Card Network to Acquirer:

    • Authorization response: Relays the issuer's decision (approval/decline), authorization code, and any relevant data like available balance.

5. Card Network ↔ Issuer

  • Card Network to Issuer:

    • Authorization request: As received from the acquirer, containing transaction and (limited) cardholder details.

  • Issuer to Card Network:

    • Authorization response: Based on the cardholder's account status, risk policies, and available funds.

Key Players:

  • Customer (Cardholder): The individual making the purchase.
  • Merchant: The business selling goods or services.
  • Acquirer: The financial institution that processes payments on behalf of the merchant.
  • Issuer: The financial institution that issued the customer's payment card.
  • Card Network: Facilitates the communication and transfer of funds between acquirers and issuers (Visa, Mastercard, Amex, Discover).
  • Payment Gateway: A technology provider that connects merchants to acquirers, facilitating online transactions.

3.1.2 - Explain the difference between acquirer, sub-acquirer and payment gateway and how the flow explained in question 1 changes for these players.

  • Acquirer: A financial institution directly contracted with card networks to process transactions for merchants. They manage merchant accounts, assume financial risk, and facilitate fund settlements.

  • Sub-acquirer: A third-party entity contracted by an acquirer to provide merchant services. They typically focus on specific market niches or offer specialized services. They might onboard merchants, manage risk, or provide customer support, but rely on the main acquirer for settlement and connection to card networks.

  • Payment Gateway: A technology platform that connects merchants to acquirers for online transactions. They encrypt sensitive data, facilitate communication between different systems, and offer various payment options. They don't directly handle funds or assume financial risk. Changes in Flow:

Sub-acquirer: Adds an intermediary between the merchant and the main acquirer. Money and information flow through the sub-acquirer before reaching the main acquirer for settlement and card network communication.

3.1.3 - Explain what chargebacks are, how they differ from cancellations and what is their connection with fraud in the acquiring world.

  • Chargebacks: A forced transaction reversal initiated by the cardholder through their issuer. It occurs when a customer disputes a charge for reasons such as unauthorized purchases, goods not received, or unsatisfactory services.
  • Cancellations: Transaction terminations initiated by either the customer or merchant before the settlement process. These are typically straightforward and do not involve card networks or dispute resolution processes.

Difference:

  • Initiator: Chargebacks are initiated by the customer, while cancellations can be initiated by either the customer or merchant.
  • Timing: Chargebacks occur after the transaction has been settled, while cancellations happen before settlement.
  • Dispute process: Chargebacks involve a formal dispute process through card networks, while cancellations don't.

Connection with Fraud:

Chargebacks are a significant indicator of potential fraud in the acquiring world. High chargeback rates might indicate:

  • Friendly fraud: Customers falsely disputing legitimate transactions.
  • Merchant error: Incorrectly processed transactions or poor customer service.
  • True fraud: Unauthorized transactions due to stolen card details or account breaches.