My mother tasked me with picking up some vegetable soup from the renowned Marianna's Kitchen in the Marketplace.
Photo by Alex Hudson on Unsplash
As I stepped into the establishment, I was met with a level of customer service that was frankly unheard of in my country. I purchased the vegetable soup and was tempted enough to add some rosemary cornbread to my order.
To finalize my purchase, I handed over my NCB VISA debit card to the cashier, who swiped it across the point-of-sale (POS) machine, handed it back to me, and I was on my way to savoring some of the best-baked bread I've had in quite some time.
Let's dissect what unfolded here:
- I ordered some food.
- I completed a transaction using my debit card.
- I received my food.
- I enjoyed the food.
What exactly transpired during that transaction? How did my money transfer from my account to the business's account?
That's precisely what we'll be delving into in today's discussion. We'll explore how traditional debit financial transactions operate.
While my analysis will focus on using a VISA debit card, the explanation I provide will be applicable to Mastercard, American Express, Discover, etc., as well.
Let's take a step back to the moment the cashier took my card.
Picture this: the cashier inputs the total amount of my order into the POS machine, takes my card, swipes it, and hands it back to me.
A distinct alert confirms that the transaction has successfully gone through, and I'm handed my goods. But what exactly unfolds in the background once my card is swiped is a fascinating journey through the realms of authorization, clearing, and settlement.
This intricate process involves both the consumer (that's me, in this case) and the merchant (the heroes selling the goods).
First up, authorization. Imagine swiping your card as handing over your bank details to the cashier, who then sends this information to their bank.
This is where the magic starts.
The transaction is catapulted to the appropriate bank or financial institution, thanks to the global network of payment processors like VISA, Mastercard, and Stripe. A payment processor then validates the transaction and zips a notification of successful authorization back to the merchant.
From a consumer's perspective, this stage sees our bank placing a hold on the funds equivalent to the purchase amount.
While it might seem like the money is playing hide and seek, it's actually just marked for the pending transaction. On the flip side, merchants receive a nod of approval but not the funds just yet. This green light means the transaction is good to go, and the funds are promised to be transferred during settlement.
Next, we dive into the clearing process.
This is essentially the behind-the-scenes choreography where transaction details are exchanged between the merchant's and consumer's banks. It's all about making sure everything is on point for the grand finale—the actual movement of funds.
A clearing file is dispatched to the payment processor, notifying the consumer's bank about the transaction.
Meanwhile, a reconciliation file finds its way back to the merchant, ensuring that the financial storybook aligns perfectly with reality. For consumers, this part of the process is like a ghost in the machine—unseen, but essential.
Transactions linger in the "pending" limbo, with funds out of reach but earmarked for completion.
Merchants, in parallel, are in a waiting game, anticipating the settlement to access the funds.
The finale of this financial symphony is the settlement process. The consumer's bank gets the cue from the clearing file and initiates the transfer of funds, which the payment processor then guides to the merchant's account.
For consumers, this is the moment the transaction graduates from "pending" to "posted," signifying the completion of the purchase.
Merchants, at last, see the fruits of their labor—or rather, the funds in their account, marking the completion of the transaction from their perspective.
The beauty of authorization is its immediacy.
It's the reason you and I can waltz out of places like Marianna’s Kitchen with our goods in hand, having proved that we are the rightful cardholders with sufficient funds.
The alternative would be a less appealing scenario where we'd be camping in the store for 1-3 days waiting for the settlement of funds to conclude.
In essence, this journey from swiping the card to enjoying your goods involves a complex dance of digital handshakes, ensuring that transactions are not just seamless but also secure.
It's a modern marvel of the financial world, one that operates silently in the background, making our everyday purchases smooth and worry-free.
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