Meaning
Financial service networks enable retail businesses to accept electronic card payments from customers. This merchant acquiring framework establishes the commercial and technical relationship between the merchant and the card associations. It governs the authorization of transactions and the routing of transaction data.
It ceases to apply to a transaction once the merchant has received the settled funds from the acquiring bank.
Transaction Processing
Payment routing requires secure systems to verify cardholder accounts during a purchase. Transaction processing occurs when the merchant’s terminal sends an authorization request to the card network. The issuer bank either approves or declines the transaction based on the available credit limit.
This approval takes only a few seconds to complete.
Financial Settlement
Merchant accounts receive funds after the transaction is cleared. Financial settlement is the actual transfer of the purchase amount, minus the merchant discount fee, to the merchant’s bank account. This transfer typically takes place within two business days.
It ensures that the business has the liquidity to continue operations.
Risk Mitigation
Card networks enforce specific rules to protect participants from fraud and customer disputes. Risk mitigation involves holding reserves or adjusting fees for merchants who experience high chargeback rates. For example, if an online retailer has a chargeback rate of three percent, which is well above the industry standard of one percent, the acquiring bank can demand a rolling reserve.
The bank holds ten percent of the merchant’s daily sales for ninety days to cover future disputes. This action protects the acquiring bank from absorbing the losses if the merchant goes out of business, ensuring the stability of the payment ecosystem.
