Visa is the largest payment card network in the US. Visa writes the rules and operates the technology supporting their network.
A payment card transaction has two major components: authorization, the synchronous approval of a transaction, and clearing, the asynchronous confirmation of the transaction.
Visa has built a wide range of functionality — debit, credit; push-to-card; bank-to-bank communication; card updates; wallets — on their network. This overview covers a tiny amount and is a simplification.
Card payments’ unique economic structure has driven evolution. Significant fees, called interchange, are paid by the merchant and shared between card issuers and Visa. Sophisticated business on both sides pull various levers to drive up or down their interchange rates and avoid fraud liability.
A payment authorization request originates from the merchant to the issuing bank. The authorization request has required details of the Primary Account Number (PAN), expiry, and amount. There are optional and conditional details also. The issuing bank synchronously responds with an approval or a decline.
A merchant batches authorizations into a clearing file submitted to Visa. Visa re-batches the transactions for onward transmission to issuing banks. Settlement is to Visa’s account at JPMorgan.
A distinctive feature of card payments is that disputes are adjudicated. A cardholder can dispute a transaction either because it was unauthorized or the service wasn’t delivered as expected. The first-line adjudicator is the issuing bank though there are also escalation mechanisms.
A card transaction can be refunded by the merchant. Recently Visa introduced an optional authorization step for refunds. More often, however, merchants simply include refund details in the clearing file.
When a merchant will keep a card number on file for future transactions, they can originate a zero-dollar or one-dollar authorization request to confirm the card number is valid. These transactions aren’t usually cleared but instead the authorization is reversed.
Card numbers can be tokenized; the resulting unique identifier can be used in place of the card number in authorization and clearing. This process underpins digital wallets like Apple Pay and is common for online subscriptions. Token validity persists across replacement cards.
Level 2 / Level 3 data
Merchants can opt to share transaction data with Visa at clearing to reduce their interchange rates. Level 2 data includes tax, customer, and shipping information. Level 3 data provides even finer details like item descriptions, quantities, and product codes.
Visa authorizations are always open.
Visa transmits clearing files on business days at a time coordinated between Visa and the issuing bank.
Authorizations use an ISO 8583 message format. It’s a fascinating format containing a bitmap table to minimize size and field-level encodings. Visa's authorization network is called BASE I (which used expand to Bank of America System Engineering).
Clearing uses a proprietary fixed-width flat file format. Visa's clearing network is called BASE II.