How Payment Transaction Processing Works

Payment transactions occur in a matter of seconds. We can easily swipe our credit card or touch to pay, and there’s an instant exchange of value. But it’s not as simple as it seems. Behind every digital transaction is an intricate web of processes that enables nearly $2 trillion in payment volume.

Within this web are new and existing opportunities to build trust among consumers, merchants, and banks. For example, payment systems have evolved to offer tools such as mobile wallets and peer-to-peer apps like Venmo that users rely on to settle the instant transfer of funds.

However, greater efficiency comes at a cost. The technological powerhouse behind modern payment systems is not always safe. Cybercriminals are breaking into accounts and shopping websites to steal credit card information, which becomes their gateway to the payment transaction process.

To make matters worse, explains Herb Stapleton, section chief for the FBI’s cyber division, in a CNBC interview, “It’s nearly impossible for a consumer to detect that this has happened to them before the actual occurrence.”

No one is safe, but understanding what happens when you make a purchase with a credit card — and how to ensure the process is as safe as possible — is the first step in becoming a more educated consumer.

Where credit card purchases begin and who is involved

You encounter the key players involved in payment transactions daily, whether it’s your credit card company or bank. Merchants and processors are also involved in transactions, but consumers are often unaware of the extent of their roles.

When a consumer swipes their card, the merchant’s bank will send out a request for authorization via the payment network. The card company then runs payment details through a variety of fraud-protection tools to validate the information.


Once the payment network confirms the authorization message, it sends a request for payment to the issuing bank (the consumer’s bank).

If the consumer is using a debit card, the network will have to verify that enough funds are available to complete the transaction. For credit cards, different rules will apply based on the consumer’s available credit or predetermined spending limits. Once the consumer’s account details are verified, the payment network is given the okay to route approval to the merchant’s bank. At this stage, payment is guaranteed.

But not so fast: the payment still has to be cleared and settled. If you were to check your credit card’s transaction history at this point, you would see that the payment was “pending.” That means an agreement between the consumer bank and merchant bank to exchange payment is being worked out. The payment has yet to be processed.

How banks and credit card companies clear and settle payments

It can sometimes take days for a payment to settle, as banks, merchants, and processors verify that funds exist and a purchase is legit.

The transaction process is completed once the funds are settled. The payment network consolidates a batch file containing all the payment data that is distributed to each bank. It can take about 24 to 48 hours for the consumer’s bank to transfer funds to the merchant’s bank account. After the payment is settled, the merchant and consumer will notice a debit or credit in their account.

The modern payment system is built on trust and speed. Throughout the entire process, consumers and merchants trust that banks and credit card companies are working to complete transactions quickly and securely.

But what happens if that trust is broken? The payment transaction process is far from perfect.

Security gaps along the payment transaction process

With trillions of dollars flowing across the digital payment ecosystem, errors are inevitable.

In the first nine months of 2019, 7.9 billion consumer records were exposed. In May 2019 alone, 42,000 credit card records from South Korea were posted for sale on the dark web. Just one month later, that number reached 230,000. Clearly, the payment transaction process is broken.

One of the most vulnerable points in the flow of payment transactions is the point of sale, when a consumer hands over sensitive data to merchants. The merchant is responsible for having security measures in place to protect that information. In fact, they must follow the Payment Card Industry Security Standards Council (PCI) guidelines to protect against security breaches (e.g., with strong passwords, software patches, and encryption).

But even if merchants safeguard their payment systems, it still doesn’t mitigate the risk to the consumer or payment processor. Fraudulent activities, scams, and even theft can occur before a transaction is placed.

When scams appear legit at the point of sale, payment transaction processes are completed. Only when consumers and merchants see a mysterious debit or credit on their accounts do reports of fraud surface.

So, what can we do? Merchants protect their point-of-sale systems, while banks and credit card companies provide fraud protection tools (and, in some cases, monetary coverage). And consumers can use virtual cards to make payments online—and potentially mitigate fraud before it moves through the final stages of the transaction process.

Virtual cards create a secure and efficient payment ecosystem

The payment transaction system is large and complex, but we’re still in the early days of developing groundbreaking security and efficiency tools. At Privacy, we provide virtual cards that allow consumers to have greater control over their spending.

Consumers start by opening a number of virtual cards to manage everyday purchases or subscription spending. If fraud is detected or a merchant places a charge without permission, consumers can pause or stop transactions on their virtual card at any time.

Unlike standard credit cards, virtual cards use unique card numbers, which can be turned off or limited in real time. These features allow the consumer to actively mitigate security gaps that can occur throughout the payment transaction process.

But it’s not just up to the customer. By law, companies are required to have procedures in place to get ahead of potential security risks early in the customer relationship. Know Your Customer guidelines enable businesses to verify customer identity, suitability, and risk when it comes to facilitating payment transactions. KYC maintains that identifying suspicious elements early can help mitigate risk.

So, what can be done? There are a number of reasons why you should use a virtual card to safely make payments online.

  • Pause or close a virtual card at any time. This can help put a stop to fraudulent transactions before processing and clearing takes place.
  • Go incognito with a unique credit card number. Virtual cards allow you to use improvised information at checkout to fight against hackers and protect yourself against data breaches—an important consumer safeguard right at the point of sale.
  • Set parameters, limits, and restrictions—perfect for business owners to pass around company cards without the risk of fraud or overspending that can hurt the bottom line.