Introduction
Businesses that accept cards must understand how card processing works because our society is becoming increasingly cashless. The Card Processing Works in Canada and Canadian payment system combines advanced technology and financial operations to provide secure and fast and dependable processing. This article explains the basic process of card transactions starting from customer payment until funds reach your bank account.
Importance of Understanding Card Processing
The Canadian credit card processing system enables customers to use their debit credit prepaid and gift cards for making purchases at terminals or online linked to Interac and EFT systems. The Canadian credit card processing system offers quick and reliable service to customers at their point
The Key Players in a Canadian Card Transaction
The fundamental entities that participate in this process require clarification before we start. These different entities work together to achieve a secure transaction through their separate responsibilities:
The Cardholder (Customer):
The person who uses their credit or debit card to complete a purchase.
The Merchant:
Your business which receives payments for products or services.
The Point-of-Sale (POS) System:
The physical terminal, online payment gateway, or mobile device used to initiate the transaction. This is the first link in the chain.
The Payment Processor:
A company that acts as an intermediary, routing the transaction data between the merchant and the financial institutions. Examples in Canada include Moneris, Elavon, and Square. They provide the merchant services credit card processing.
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The Card Network (e.g., Visa, Mastercard, Interac):
The global network that facilitates the communication and transfer of funds between the banks.
- The Issuing Bank:
The financial institution that issued the card to the customer. This bank holds the cardholder’s funds or credit line.
- The Acquiring Bank:
The financial institution that holds the merchant’s business bank account and receives the funds on their behalf.
The 5 Steps of a Card Transaction
A credit or debit card transaction in Canada, from start to finish, can be broken down into five primary stages:
Step 1: Authorization
This is the initial and fastest part of the process.
- Initiation: The cardholder taps, inserts, or swipes their card (or enters their details online). The POS system or payment gateway captures the card data and the transaction amount.
- Request: This data is encrypted and sent to the payment processor.
- Routing: Once the processor receives the request it directs the message to the appropriate card network (such as Visa) which then forwards it to the issuing bank.
- Verification: The cardholder’s account receives verification from the issuing bank. The process includes verifying available debit funds or credit limit and validating the card and conducting security assessments to detect fraudulent activities.
- Response: The issuing bank sends an “approved” or “declined” response back through the card network to the payment processor.
This entire authorization process typically happens in a matter of seconds, making it feel instantaneous to the customer.
Step 2: Batching
After a day of transactions, the merchant “batches” all the authorized payments. This process, often automated by the POS system, involves grouping all approved transactions together and sending them to the payment processor at the end of the business day. Batching is a crucial step that prepares the transactions for the next stage: settlement.
Step 3: Clearing
The clearing stage is where the financial data is prepared for the fund transfer. The payment processor sends the batch of approved transactions to the card network. The card network then “clears” the transactions by forwarding the data to the issuing banks, which are now officially notified of their payment obligations.
Step 4: Settlement
This is the stage where the money actually changes hands. The issuing bank transfers the funds to the acquiring bank, minus the interchange fee. The acquiring bank receives the funds and deposits them into the merchant’s bank account. This process, known as “settlement,” usually takes 1-3 business days in Canada.
Step 5: Funding
The final step is when the funds become available to the merchant. The acquiring bank releases the settled funds into the merchant’s business account, completing the transaction cycle.
- The Costs Involved: Understanding the Fees
Merchants in Canada do not receive the full amount of a transaction. The cost of card processing is deducted at various stages and is a critical factor for any business. The main fees include:
- Interchange Fees:
This is the largest portion of the cost. The acquiring bank must pay an unalterable fee to the issuing bank which represents the transaction cost. The card networks Visa and Mastercard determine interchange rates which depend on multiple factors such as card type (e.g., rewards, business), transaction method (in-person vs. online) and merchant industry.
- Assessment Fees:
A small fee charged by the card networks themselves (e.g., Visa, Mastercard) for using their network.
- Markup:
The fee charged by the payment processor and acquiring bank for their services. This is where pricing models differ and what merchants can often negotiate.
Special Considerations for the Canadian Market
Canada has a specific regulatory environment that influences card processing. The Code of Conduct for the Payment Card Industry in Canada ensures greater transparency and fairness for merchants.
This code requires providers to:
- Offer clear and simple contracts with no hidden fees.
- Provide merchants with a 90-day notice of any fee increases.
- Give merchants the right to cancel their agreement without penalty if fees increase.
The Rise of Fintech and Virtual Card Issuing
The payment sector continues to transform quickly through the introduction of fintech payment processing systems. These businesses create new approaches which go past basic merchant services through their development of sophisticated credit card processing solutions for digital commerce. Virtual card issuing together with virtual card payment processing have gained substantial importance because businesses transition toward digital-first payment solutions.
Virtual Card Issuing: Fintech companies and banks can now issue virtual cards that exist only digitally, often tied to a specific account. This is a game-changer for businesses that want to manage employee expenses or pay vendors with greater control and security.
Fintech Payment: Processing platforms deliver user-friendly APIs together with seamless integrations and modern features which include tokenization and advanced fraud detection capabilities. E-commerce businesses that require a powerful and scalable payment gateway find these platforms to be their preferred choice.
A Canadian business needs knowledge of card processing fundamentals to make educated decisions about its payment systems. Your understanding of fundamental card processing elements together with transaction phases and associated costs enables better decision-making for secure and economical payment choices.
Frequently Asked Questions (FAQs)
- Processor vs. Gateway?
A: processor handles the money transfer. A gateway is the technology that sends the transaction info.
- How fast do I get paid?
A: Funds usually settle in 1-3 business days.
- What are interchange fees?
A: The largest portion of your costs, paid to the customer’s bank. They are set by card networks and are non-negotiable.
- Can I get a better rate?
A: Yes, you can often negotiate the processor’s markup, especially with high sales volume.
- How secure is it?
A: Very secure. All businesses must be PCI DSS compliant to protect card data.
- What’s a virtual card?
A digital-only card for online payments, offering extra security.
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