What happens at the backend every time you swipe your credit card?

by Niranjanakumar Upadhye

Have you ever wondered what happens when you swipe, dip or wave those lovely plastic cards when paying a merchant? A lot of us may have turned beetroot red when a cashier tells us politely, “Sir/Ma’am, this card does not seem to work, and do you want to use another card or an alternate means of payment?”Before we look at the reasons why our credit & debit card transactions are not approved sometimes by the card-issuing institution, let us first know how a card transaction takes place.

Let’s take an extreme example. Suppose you are at a merchant location in the USAand are trying to purchase some costly jewellery (during the daytime in the USA, but which is night time here in India)through your Indian-issued card. The merchant will dip the card into the Point of Sale (POS) machine,if the machine is chip-and-PIN enabled, key in the transaction amount and pressthe ‘Sale’ button.

It may be interesting to know that there are well over 25,000 memberinstitutions, mostly banks that issue/accept a MasterCard or a Visa card. These cards are therefore known as bank cards. It may be noted here that MasterCard, Visa, American Express, JCB, UnionPay International, Discover Financial Services, Diners’ Club, RuPayetc. are known as Card Schemes. They license member banks to issue & acquire payment cardtransactions under their labels and effect clearing &settlements for transactions between members. They also lay down operating rules, specify technological standards and help resolve disputes between various member banks.

The moment the PoS machine’s “Sale” button is pressed, a race begins. The machine dials into the Acquirer bank that provides card acceptance services to the merchant. The Acquirer then needs to obtain authorization for this transaction from the Issuer and so pushes it to the scheme likeMasterCard or Visa that actsas the bridge between their various member banks. The card scheme will route the transaction to the Issuer bank (that issues the card) to check if the transaction can be approved.

Very quickly, the Card Issuer will check for a few things such as:

• Is this card in good standing and is there enough spending limit available for a transaction of this amount to be approved?
• Has this card been reported lost or stolen?
• What has the established transaction pattern been for this specific cardholder?
• Have there been too many transaction attempts recently on this card (indicating a lost or stolen card) or are the usage patterns appearing suspicious?
• At what kind of a merchant,in which geography and through what mode is this transaction occurring – at what time – and can a combination of these be deemed as “High Risk”?
• Is the terminal chip-and-PIN capable and has a correct PIN been entered by the cardholder?Also, does it appear that the merchant is trying to bypass using the “Chip” feature of the card and merely swiping the card through its magnetic stripe?

Having analysed & scored the transaction to parse illegal, suspicious and fraudulent ones by taking into account all of the above aspects, if it reasonably rules out irregularity, the issuer sends out an ‘Approval’ response to the Acquiring bank through the card scheme and they both keep a log of the same. This guarantees a payment to the merchant when the transaction is settled. The approval response then hits the POS terminal and a ‘Transaction Success’ message is displayed and a “Sale” charge-slip is printed. Although the transaction may have crossed continents and different countries, and some very sophisticated computer systems may have applied complex algorithms, risk models & checks on the transaction, the whole cycle is completedin less than half a minute.

So the next time you feel flustered or upset about a transaction having failed, know why it happens. Network overload or certain fraudcheck parameters that kick in to protect you may be responsible. It is also interesting for you to know that ‘incorrect PIN entry’ cause about 30% of transactions to be declined, followed by insufficient funds, that causes about one-fourthof transaction failures. So remember to use your card wisely and with care, so that you do not face transaction failures.

Mr. Niranjankumar Laxman Upadhye is the General Manager of the Fraud Risk Management division at Worldline