A transaction online is the process by which a customer makes a purchase or payment through the internet using a credit card, debit card, or another electronic payment method. Below is an explanation of how it works and the roles of the issuing bank and acquiring bank:
Process of an Online Transaction
Initiation of the Purchase
The customer selects a product or service on the online store (e-commerce) and chooses to pay using a card or another electronic method.Other payment methods, such as PSE button in Colombia and PIX in Brazil, are also available. There are also direct charges to bank accounts.
Input of Payment Details
The customer enters their card information (card number, expiration date, CVV) or uses a digital wallet.Transmission to the Payment Gateway
These details are securely sent to the payment gateway (a platform that connects the merchant with the payment processing network).Verification and Authorization
Here, the acquiring bank and the issuing bank come into play:Acquiring Bank: The financial institution providing payment processing services to the merchant. It receives the payment request and sends it to the card network (e.g., Visa, Mastercard).
Card Network: Transfers the payment request to the issuing bank of the customer's card.
Issuing Bank: The bank that issued the customer's card. It verifies if the customer has sufficient funds and whether the transaction complies with its security policies.
Authorization Response
The issuing bank sends a response (approved or declined) through the card network to the acquiring bank and, finally, to the merchant.Customer Confirmation
If the transaction is approved, the merchant confirms the purchase to the customer and proceeds with shipping the product or delivering the service.Settlement of Funds
After authorization, the acquiring bank handles settlement, transferring the funds from the issuing bank to the merchant (minus fees).
Summary of Money Flow
The customer pays with their card.
The issuing bank guarantees the funds.
The acquiring bank processes the payment.
The merchant receives the money, usually with fees deducted.
If you have further questions or need an explanation of any technical aspect, feel free to ask.
Reasons Why Online Transactions May Fail
Not all transactions are successful, and failures can occur for various reasons. The responsibility for these failures lies with different actors in the process, depending on the issue's nature. Below are the main causes:
1. Problems Related to the Customer
Cause:
Insufficient Funds: The customer does not have enough money in their account or credit line.
Incorrect Data: The customer entered the wrong card number, expiration date, CVV, or name.
Exceeded Limit: The customer exceeded their daily or monthly card limit.
Expired or Blocked Card: The card is invalid or inactive due to the issuing bank's decision.
Unauthorized Use: The issuing bank rejects the transaction because it considers it fraudulent.
Responsible Party:
Generally, the customer or the issuing bank (if the transaction is deemed risky).
2. Problems Related to the Merchant
Cause:
Incorrect Configuration: Errors in integrating the payment gateway or configuring parameters.
Issues with Acquirer Contract: The merchant does not have authorization to process certain transaction types (e.g., international).
Unsupported Currency: The merchant does not accept the currency used by the customer.
Funds Not Held Properly: The merchant mismanaged the money reservation, and the transaction expired.
Responsible Party:
The merchant for improperly configuring or managing payment infrastructure.
3. Technical Issues with the Payment Gateway
Cause:
Timeout Exceeded: The system does not receive a response from the acquiring or issuing bank within the set time.
Connection Errors: Failures in communication between the gateway, acquirer, or card network.
Encryption Failure: Data is not securely transmitted, or vulnerabilities are detected.
System Maintenance: Transactions may be rejected if the gateway is under maintenance.
Responsible Party:
The payment gateway or the processing network.
4. Problems Related to the Issuing Bank
Cause:
Suspected Fraud: The bank blocks the transaction as suspicious (even if it is legitimate).
Internal Errors: Failures in the issuing bank's systems to validate the transaction.
Geographic Restrictions: The card is not enabled for international purchases or specific regions.
Responsible Party:
The issuing bank for applying overly restrictive rules or facing operational issues.
5. Problems Related to the Acquiring Bank
Cause:
Authorization Failure: The acquirer cannot process the request due to internal technical issues.
Settlement Errors: The acquirer fails to correctly transmit the request to the issuing bank or card network.
Unauthorized Merchant: The acquiring bank may have temporarily suspended the merchant's access.
Responsible Party:
The acquiring bank for not properly managing transactions.
6. Problems Related to the Card Network
Cause:
Service Interruptions: Networks like Visa or Mastercard may experience temporary outages.
Routing Errors: The network cannot redirect the transaction correctly between acquirers and issuers.
Policy Rejections: The network detects an inconsistency with usage rules.
Responsible Party:
The card network for infrastructure issues or restrictive policies.
Payment Gateway vs. Aggregator
Both are solutions to facilitate electronic transactions, but they differ in how they operate and who they target. Below is a detailed comparison:
Gateway:
Definition: A technological service that acts as an intermediary between a merchant and payment networks (issuers, acquirers, and processors) to securely process online transactions.
Key Characteristics:
Direct Connection to Acquirer: The gateway connects to the merchant’s acquiring bank to process payments.
Requires Direct Contract with Acquirer: The merchant must sign a contract with an acquiring bank.
Individual Management: The merchant manages their own merchant account and relationship with the acquiring bank.
Flexibility and Control: Allows for customization and greater control over transactions.
Typical Use:
Suitable for large or medium-sized businesses processing high transaction volumes that desire full control over payment systems.
Examples:
Stripe (can act as a gateway or aggregator), Authorize.Net.
Aggregator:
Definition: A model where a company acts as an intermediary between the merchant and acquiring bank, grouping multiple merchants under a single shared merchant account.
Key Characteristics:
No Merchant Account Required: The aggregator provides its own account for processing transactions.
Simplification: The merchant does not need direct contracts with an acquiring bank.
Lower Initial Costs: Ideal for small businesses or startups, reducing entry barriers.
Centralized Liquidity: Funds from multiple merchants are settled through the aggregator and distributed afterward.
Typical Use:
Best for small and medium-sized businesses seeking simplicity and low initial costs.
Examples:
PayPal, Mercado Pago, Square.
Key Differences Between Gateway and Aggregator
Aspect | Gateway | Aggregator |
Merchant Account | Merchant needs their own account | Aggregator provides the account |
Acquirer Contract | Required | Not required |
Integration Ease | More complex | Simpler |
Initial Cost | High (contracts and configurations) | Low |
Fund Settlement | Directly to the merchant | Through the aggregator |
Control | Greater control for the merchant | Less control for the merchant |
Scalability | Ideal for high volumes | Best for small volumes |
How to Choose Between Them
Use a Gateway if:
You process large transaction volumes.
You want total control over your payments.
You are willing to handle higher initial costs and technical complexity.
Use an Aggregator if:
You are a small business or just starting out.
You want a quick and simple solution.
You do not want to manage contracts with acquiring banks.
In summary, the online payment ecosystem is complex and highly structured, involving multiple players such as the customer, the merchant, issuing banks, acquiring banks, card networks, and technological solutions like payment gateways and aggregators. Each one plays a specific role in ensuring transactions are processed securely and efficiently, although they can also be responsible for failures depending on where the problem occurs in the process. Choosing between a gateway and an aggregator depends on the specific needs of the business, considering factors such as transaction volume, desired control, and initial costs. Understanding these dynamics is essential to optimizing the payment experience and minimizing errors, benefiting both customers and merchants.