8. Payment processing:- Magical Secret behind the credit and debit card transactions| How does it work

Payment processing

Payment processing is a general term that refers to how transactions between a customer and merchant are automated. payment processing is an effective system for your business to be an important part of any successful transaction, as well as maintaining customer satisfaction and building a positive brand reputation.

Payment processing is a general term that refers to how transactions between a customer and merchant are automated. Third-party service, typically a computer-based system such as an e-merchant gateway that processes the customer’s payment information and is set up to accept or reject transactions on behalf of the merchant based on pre-determined parameters.

Have you ever wondered how money is transferred from our bank account to a shopkeeper’s bank account through debit or credit card? If yes, So, let us show you today how credit/debit card transactions are processed.

Payment processor

A payment processor manages the credit card transaction process by acting as an mediator between merchants and financial institutions. A processor can authorize transactions and make timely payments by facilitating the transfer of funds to merchants.


The issuer is the cardholder’s bank, which is responsible for making payments to the acquirer (merchant bank account) for accepted card transactions and collecting payments from cardholders.

Acquirer or merchant bank

The acquirer, also known as merchant bank, is a financial institution that maintains a merchant’s account to accept credit cards. The acquaintance settles the card transaction for a merchant in his account. Sometimes the payment processor and the acquaintance are the same.

PCI compliance

PCI compliance PCI DSS refers to compliance with the payment card industry data security standard. PCI DSS is an information security standard that applies to all entities involved in processing, storing, and/or transmitting payment card information. Any merchant that accepts payment by card must follow the PCI mandate. Failure to achieve and maintain PCI compliance can leave a trader sensitive to data breaches and the negative consequences to come, including fines, fees, and lost business.

EMV chip cards (Europay, Mastercard and Visa), payment processing

EMV Card also known as Smart Card, Chip Card, (Chip and pin) Card, and Integrated Circuit Card. EMV technology is the latest technology created by three companies Europay, MasterCard, and Visa.

Payment processing

Chip cards provide many protections that standard magnetic stripe cards lack. A unique code is generated with each chip-and-PIN card transaction. Even if a hacker manages to steal the authentication code, it is useless for future transactions. Because the next time when using the EMV will generate a new unique transaction code. The embedded microchip in the smart card that records all data of credit/debit card in encrypted form so makes it almost impossible to make a duplicate card of the real card.

Why EMV cards was introduced in payment processing

Before the EMV card entered the market, a magnetic strip type debit/credit card was used, but due to the lack of some security in the magnetic stripe card, the EMV card was entered in, so let us know a little about the weaknesses of the magnetic strip.

Magnetic strip or magstripe card, Payment processing
payment processing

Magnetic Stripe (magstripe) works on analog technology that records credit or debit card data. magstripe came into widespread use in the 1980s and represented a significant security upgrade from paper-based credit card impressions.

Unfortunately, the technology behind the magstripe eventually proved to be fairly easy for hackers. Although hidden from the naked eye, the magnetic stripe placed sensitive credit card data in plain text on the card. Criminals turned to credit card “skimmers” and other methods to collect this data. Due to the data being in plain text, it becomes very easy for hackers to steal and commit fraud

How are EMV chip card transactions processed? (Payment processing)

EMV Chip cards work with payment acceptance devices that are certified to conform to EMV chip-and-PIN standards. During the transaction, the customer inserts the payment card in the terminal. Chip and card readers communicate to authenticate transactions.

After inserting the card into the card reader, the customer follows the card reader’s on-screen instructions that validate the transaction. This process can vary, depending on which verification method is specified by the card-issuing financial institution. The chip-and-signature system is largely being replaced by chip-and-PIN transactions, requiring the customer to enter a PIN (personal identification number) to complete the transaction.

After the cardholder authentication methods are completed at the terminal, online processing begins. Additional authentication and other security such as fraud can be filtered before the card issuer returns the approval or reject code at the EMV terminal.

How Debit/Credit Card payment processing Works-

payment process
Image: quora.com

1st Step

First, the customer inserts the card into the card reader so that the card reader reads the encrypted data recorded in the card and then sends the collected information to the card network (Visa, MasterCard, RuPay card).

2nd step

The card network checks all the data received by the card reader and sends it to the financial institution issuing the card.

3rd Step

The information received by the card network, financial institutions matches with recorded data in the customer’s bank accounts, after the data matches, the transaction is approved and sent to the card network.

4th Step

Once the approved transaction received by the Financial Institution is checked again by card network and send to the card reader for approve/disapprove the transaction

The card reader accepts or rejects the transaction according to the information the card reader gets through the card network. Similarly, the payment processing of any credit or debit card is transacted from one bank account to another.


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