The Payments Transaction Flow

Author Picture
Jonathan Jacobs
A grey card on a purple background outlining the payments transaction flow

Payment transactions play a vital role in fuelling the economy, seamlessly connecting merchants and customers in today’s digital landscape. The journey of a payment transaction, from the card tap to bank approval, involves a complex work of technology and security measures working together. Understanding this intricate process is not only valuable for merchants and customers but also essential for recognising the layers of security measures in place.


Understanding the Payment Transaction Flow

The flow begins with the customer tapping their card on the card machine.  This initiates the payment process and sends the transaction details to the merchant's payment processor. 

The payment processor then forwards the transaction information to the acquiring bank, which is responsible for the merchant's bank account.

Next, the acquiring bank sends the transaction details to the card network, such as Visa or Mastercard. The card network acts as an intermediary between the acquiring bank and the customer's bank, also known as the issuing bank. The issuing bank verifies the customer's account balance and checks for any fraud or suspicious activity.

Once the issuing bank approves the transaction, it transfers the funds to the acquiring bank and sends an authorisation message back to the card network, which then relays the message to the acquiring bank.

The acquiring bank receives the authorisation message and sends it to the merchant's payment system. This confirms that the payment has been approved, and the merchant can proceed with the transaction.

Finally, the card machine displays a confirmation message to the customer, indicating that the transaction was successful. At this point, the payment transaction flow is complete.

The Payments Transaction Flow


The Role of the Merchant and Cardholder

In a payment’s transaction, the merchant refers to the business or individual selling either goods or services. They are responsible for initiating the transaction and providing the necessary payment infrastructure to complete the transaction, such as card machines. The cardholder is the customer who wishes to make a purchase and completes the transaction by tapping or inserting their card on or in the card machine.

The merchant is responsible for ensuring that their payment infrastructure is in working order and capable of securely transmitting the payment information to the payment processor.

The cardholder must have a valid card that is accepted by the merchant. Once the cardholder has either inserted or tapped their card on the machine they need to follow the instructions provided by the card machine to complete the transaction.

Understanding Payment Processors and Bank Schemes

Payment processors act as intermediaries between the merchant, the card holder and the bank schemes. They facilitate the secure transmission of payment information and ensure that the transaction flows smoothly.  Payment processors include payment facilitators (PayFac’s), Gateways or Payment Service Providers (PSPs).

PayFac’s, Gateways and PSPs

A PayFac simplifies the process of accepting payments for smaller merchants by aggregating transactions from multiple smaller merchants into their merchant account. They take on the risk of managing payment processing for their sub-merchants and offer a faster and easier way to accept payments by streamlining the onboarding process.

A Gateway facilitates the transfer of payment data to the merchant’s bank account. They act as an intermediary between the merchant and the payment processor to securely authorize and process transactions.

A PSP is offers merchants a range of services to accept and process payments from their customers, possibly including payment gateway services, payment processing, fraud detection and currency conversion.  They serve as a single point of contact for merchants to manage their payments both online and in person, and often integrate with multiple payment processors and acquirers to offer their customers flexibility.

Bank Schemes

Bank schemes consist of both issuing and acquiring banks.

Issuing banks are the banks that issue the payment cards to cardholders, while acquiring banks are the banks that work with the merchant to enable them to accept card payments.

Payment processors work closely with bank schemes to authorize and authenticate the payment transactions. They communicate with the issuing bank to ensure that the cardholder has sufficient funds and that the transaction is valid. Additionally, they work with the acquiring bank to settle the payment and transfer the funds to the merchant's account.

Authorising and Authenticating the Payment

Authorisation and authentication are crucial steps in the payment transaction flow. After receiving the authorisation request from the payment processor, the issuing bank evaluates the transaction's risk factors and checks the cardholder's account status. They may use various security measures, such as PIN or signature to authenticate the cardholder's identity and ensure the transaction is secure.

Once the issuing bank completes their checks and verifies the transaction, they send an authorisation response to the payment processor. This response indicates whether the payment has been approved or declined.

The payment processor receives the authorisation response and relays it to the merchant. If the payment is approved, the transaction flow proceeds to the next stage. If the payment is declined, the transaction is cancelled, and the cardholder is notified.

Securing the Transaction Flow

Ensuring the security of the transaction flow is essential to protect the cardholder's sensitive information and prevent fraud. Several security measures are in place to safeguard the payment transaction.

The sensitive payment information that is transmitted between the card machine, the payment processor and the bank schemes is encrypted to ensure that it cannot be intercepted or tampered with.

Additionally, fraud detection and prevention systems are implemented by payment processors and bank schemes to identify and mitigate fraudulent transactions. These systems analyse various factors, such as transaction patterns, IP addresses, and cardholder behavior, to detect suspicious activity and trigger additional security checks if necessary.

The payment transaction flow is a complex yet essential process that involves various key players, including merchants, cardholders, payment processors and bank schemes.Each player plays a crucial role in ensuring the smooth and secure transfer of funds from the customer’s card to the merchant’s account.