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A quick guide to payments in e-Commerce

E-Commerce is quite easy to understand. It is the trading of goods or services in exchange for payments via the Internet. The payment network of e-Commerce on the other hand is a bit harder to grasp. Do you know how a payment in a webshop ends with the webshop owner? Let’s dive into this somewhat complicated but very important topic.

Four Party Scheme

A popular model for describing the payment network is The Four Party Scheme. However, in reality there can be up to six parties involved in the transaction of money between the buyer and seller.

The Four Party Scheme
The Four Party Scheme

The Cardholder

The cardholder is the buyer. It can be an individual or a company owning a credit/debit card and making a purchase with this card in a webshop.

The Merchant

The merchant is the seller. In e-Commerce this is a company selling products or services in their webshop. In order to accept card payments in his webshop, the merchant needs to select a gateway and make an agreement with an acquirer.

The Gateway

The gateway provides the payment window in the webshop. This window is where the cardholder types in his card information when he reaches check-out. The gateway also handles the card information and forwards it in an encrypted version to the acquirer. The gateway offers a solution that enables the merchant to accept card information in his webshop and administer payments.

The Acquirer

The acquirer handles the transaction of money between the cardholder and the merchant. When the acquirer receives the card information from a purchase made on a webshop, it will check with the issuer if the card is valid and if there are sufficient funds for the purchase. If the credit card information is valid, the purchase is authorized and the acquirer will reserve the money on the cardholder’s account linked to the card. After being given the instruction to do so, the acquirer will withdraw the sum from the cardholder’s account. The acquirer transfers the money to the merchant according to a payout cycle specified in the agreement.

The Issuer

The party issuing the credit/debit card, most often a bank. The bank provides an account linked to the card and confirms the transactions made with the card by verifying the card details and the sum present in the account of the cardholder.

The Card Schemes

The card scheme represents a link between the acquirer and the issuer. A card scheme facilitates the transfer of the card information (clearing) and the sum (settlement) for an authorized purchase between the acquirer and issuer. Visa and Mastercard are two examples of card schemes which are popular worldwide.

Why The Four Party Scheme when there are six parties?

The Four Party Scheme puts the spotlight on the four key parties (cardholder, merchant, acquirer, issuer) in a transaction but it is important not to neglect the other two parties. The gateway is vital in transferring the card information and is also often the company that interacts the most with the merchant (allowing the merchant to handle transactions etc.). Just as important are the card schemes (e.g. Visa and Mastercard) which take care of the clearing and settlement between issuers and acquirers.

The term “Four Party Scheme” is used for the model because the four main parties are completely separate entities while the payment gateways and card schemes are parties that share and foster connections between them. There are cases however where a party is integrated in another. For example, some acquirers provide a complete solution by offering both acquiring and gateway services. Another example is the old payment model, in which the issuing bank also took care of the acquiring part, called the Third Party Scheme.

To Sum Up

In brief, the transaction consists of two parts. First, card information is transferred from the cardholder through all parties ending with the issuer. If the card information is valid, the request for the payment is confirmed. Second, money is transferred in the opposite direction from the issuer, through the acquirer, ending with the merchant. When the merchant has received the money for the goods/services provided, the payment process is said to be complete.

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