How we pay: Breaking down card payments

“Cash, check, debit or credit?”

When it comes to doing business, U.S. merchants and consumers enjoyed a simple, straightforward framework of payment methods for more than 50 years. Whether a customer was making a purchase on the phone, in person or via snail mail, they chose from one of four options – cash, check, debit or credit. The age of payment simplicity ended in 1991, when the Internet was introduced. Since then, the Internet has disrupted a long list of industries, to include how customers shop and pay for their goods and services.

Today’s consumers can choose from a range of shopping channels beyond brick and mortar stores to include online shopping using desktop computers, laptops, and tablets. Mobile smart phones, in particular, have given customers the ability to shop in their cars, at the gas pump or via a virtual assistant like Amazon’s Alexa.

Offering new shopping channels exposes business owners to new (and always evolving) payment methods. Read on to discover why your business should care about new payment methods, gain a better understanding of what a payment method is, and get a high level overview on what it takes to process one of the most popular payment methods in America – debit and credit cards.

The evolving payment landscape

Cash payments are straight forward – they’re physical and direct transactions between you, the business owner and your customers.  But when customers opt to pay with a different method, like a gift card, credit or debit card, the process of getting paid gets more complicated. When it comes to card payments, closing a new sale doesn’t happen automatically. In fact, getting paid involves a lot of different people, as well as technology. At a high level, merchants must have certain technologies in place to accept card payments. These technologies work to easily accept a card payment, securely process a payment and quickly facilitate fund settlements. Here’s a quick overview of the key players involved in processing a standard card-based transaction.

The Customer

The customer supplying his or her payment details at the point of sale to purchase whatever goods or services you sell.

The Merchant

Merchants initiate the payment process by capturing the customers’ payment information using a Point of Sale (POS) system, credit card terminal, payment gateway or virtual terminal.

The Issuing Financial Institution

The financial institution that issues credit and debit cards to consumers and other organizations. The issuing financial institution is also responsible for transferring funds to pay merchants.

The Acquiring Financial Institution

The holder of the merchant’s bank account. This financial institution receives debit and credit card payments through the merchant processor before depositing funds on the merchant’s behalf.

The Merchant Processor

The merchant processor assumes responsibility for routing payment details through the card networks to the customer’s issuing bank. The merchant processor also returns payment approvals to the consumer, merchant, and the acquiring bank.

The Card Network

These four major credit card networks you’re probably familiar with –  Mastercard,® Visa®, American Express® and Discover® – serve as the connection between a business owner’s bank and a consumer's card-issuing bank.

Let’s take a closer look at two different types of card systems

Close Loop Card System

A Closed Loop card system is used for specific types of cards issued by merchants – like gift cards and store-specific credit cards. Closed Loop card systems restrict a customer’s usage of credit, debit or gift cards to only businesses and merchants within this system. Real-life examples of Closed Loop card systems include store-specific cards offered by “big-box” merchants like Target or Macy’s. There are also brand-specific cards that can be used at any store that falls under a brand’s umbrella. For example, the Gap offers a credit card that can be used at all company stores to include Banana Republic, Old Navy, Hill City and Athleta.

Private-issue cards such as Discover and American Express are also considered to be Closed Loop card systems. Although both cards are widely accepted at most businesses, these providers process their own payments instead of relying on card networks. Closed loop card systems come with a few benefits to merchants. First, closed loop card systems typically have lower transaction costs. Second, merchants have more opportunities to increase customer loyalty and spend, via the opportunity to provide more targeted offers and incentives based on purchasing habits and spending.

Open Loop Card System

Open Loop card systems are for debit and credit card purchases made at any merchant or business. All cards that carry the Visa or Mastercard logo are able to work on the open loop system. Open loop payments are automatically processed through the network associated with the card, regardless of the merchant, merchant processor, bank or customer.

Today, many stores offer both open and closed loop card systems.

Keeping pace with payments change

Today’s customers can choose from a variety of new and different methods of payment to buy the products and services they need.  Gift cards, Person-to Person (P2P) payment mobile apps like Zelle and Venmo, have created the need for remote, online payment processing. As the pace of change only continues to accelerate, it’s important for business owners to educate themselves on the evolving payments industry landscape. Understanding new payment methods and trends is critical to preventing payment fraud, growing your business and keeping pace with changing customer demands.