A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's promise to the card issuer to pay them for the amounts plus the other agreed charges. The card issuer (usually a bank) creates a revolving account and grants a line of credit to the cardholder, from which the cardholder can borrow money for payment to a merchant or as a cash advance
credit card payment is processed in much the same way that in-store purchases are
■ Major difference is that online merchants do not see or take impression of card, and no signature is available (Card Not Present (CNP) transactions)
There are five parties involved in an online credit card purchase: consumer, merchant, clearinghouse, merchant bank (sometimes called the “acquiring bank”), and the consumer’s card issuing bank.
■ In order to accept payments by credit card, online merchants must have a merchant account established with a bank or financial institution.
■ A merchant account is simply a bank account that allows companies to process credit card payments and receive funds from those transactions.
■ As shown in Figure 5.15, an online credit card transaction begins with a purchase .
■ When a consumer wants to make a purchase, he or she adds the item to the merchant’s shopping cart.
■When the consumer wants to pay for the items in the shopping cart, a secure tunnel through the Internet is created using SSL/TLS.
■ Using encryption, SSL/TLS secures the session during which credit card information will be sent to the merchant and protects the information from interlopers on the Internet.
■ SSL does not authenticate either the merchant or the consumer.
■ The transacting parties have to trust one another.
■ Once the consumer credit card information is received by the merchant, the merchant software contacts a clearinghouse .
■ As previously noted, a clearinghouse is a financial intermediary that authenticates credit cards and verifies account balances.
The clearinghouse contacts the issuing bank to verify the account information .
■ Once verified, the issuing bank credits the account of the merchant at the merchant’s
■ bank (usually this occurs at night in a batch process) . The debit to the consumer account is transmitted to the consumer in a monthly statement
Limitations of Online Credit Card Payment Systems
■Security: neither merchant nor consumer can be fully authenticated
■ Cost: for merchants, around 3.5% of purchase price plus transaction fee of 20 – 30 cents per transaction
■ Social equity: many people do not have access to credit cards (young adults, plus almost 100 million other adult Americans who cannot afford cards or are considered poor risk)