Processing: Behind a MasterCard Transaction – How it Works

Using a MasterCard payment card has become as easy and routine as switching on a light. However, behind this simple task lies a series of complex and intricate payment processes designed to keep commerce moving in the blink of an eye, around the clock and around the world. At the center of it all is the MasterCard Worldwide Network—seamlessly processing billions of transactions a year so that consumers, businesses and governments can purchase the things that matter most to them, whenever and wherever they want.

Through its network, MasterCard plays a critical role in processing, or switching, transactions—connecting merchants, financial institutions and cardholders together to facilitate fast, reliable and secure payments. Switching a transaction – whether at a store, by phone or online – involves three functions authorization, clearing, and settlement—in which merchants, financial institutions and cardholders each play a part.

Authorization

The first step in transaction switching is authorization. When you present your card or device for payment, the merchant sends your payment information to its financial institution, the acquirer, for authentication. The merchant acquirer authenticates, or establishes your identity, and sends your payment information to MasterCard for account validation and routing. Despite all of these steps, MasterCard authorizes your purchase quickly and reliably. At this point, MasterCard may also perform additional security checks such as scoring the probability of fraud in your transaction or determining whether your card has been stolen. From there, MasterCard routes your payment information to the financial institution, or issuer of your card, for verification. Once your issuer verifies the availability of funds in your account and places a hold on them for the amount of the purchase, it sends the verification to MasterCard. MasterCard routes the verification to the merchant acquirer, who in turn notifies the merchant that your purchase has been approved. Despite all of these steps, MasterCard authorizes your purchase quickly and reliably.
Clearing The second step in transaction switching a transaction is clearing. Typically within a day of authorization, the merchant sends all of their MasterCard-based sales transactions to its acquirer. The merchant acquirer batches and sends the payment information to MasterCard. At this point, MasterCard validates the accuracy of the transaction information submitted by the merchant acquirer and may optionally determine the necessary fees and currency conversion (if you make a purchase outside of your home country) in order to reconcile funds between issuers and acquirers. This reconciliation process balances funds between payment parties on a regular basis.
Settlement The third and final step in transaction switching is settlement. Usually within two days of authorization after transactions have been cleared, MasterCard calculates the net settlement position, or debited and credited amounts, for issuers and acquirers—advising your issuer of the funds to be debited from your account, while notifying the merchant acquirer of the funds to be credited to the merchant’s account. To facilitate the exchange of funds between issuers and acquirers, MasterCard typically designates a third-party settlement bank. Your issuer will debit your account and send a payment in the amount of your purchase to the settlement bank. In turn, the settlement bank will send the payment to the merchant acquirer who ensures the merchant is paid for your purchase.

As consumers and businesses seek ever more sophisticated and convenient methods of payment, MasterCard is there, advancing commerce for merchants, financial institutions and cardholders all over the world with fast, reliable and secure transaction processing.
From http://www.mastercard.com