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Consumer Shopping Channels
The Players Involved in These Different Methods of Payment
Cash payments are simple. They are direct, physical transactions between consumers and merchants.
When consumers choose different methods of payment – such as credit, debit, or gift cards – the process becomes more complicated.
To get paid, merchants must have technology in place to:
- Accept the card payments easily
- Process these payments securely
- Facilitate fund settlements quickly
However, closing a new sale doesn’t happen automatically. Below is a payment processing overview that outlines all the key players involved in a standard card-based transaction.
The Consumer
As the individual buying whatever goods or services you sell, the consumer plays a critical role by supplying his or her payment details at the point of sale.
The Merchant
Merchants initiate the process by capturing their customers’ information at a POS system, credit card terminal, payment gateway, or virtual terminal.
The Merchant Processor
A processor is responsible for routing payment details through the card networks to the consumer’s issuing bank. It also returns payment approvals to the consumer, merchant, and the acquiring bank.
The Issuing Bank
The issuing bank is the financial institution that provides consumers and other organizations with credit and debit cards. It is also responsible for transferring funds to pay merchants.
The Acquiring Bank
The acquiring bank is the financial institution that holds the merchant's bank account. It receives debit and credit card payments through the processor before depositing funds on the merchant’s behalf.
The Card Network
The four major credit card networks – Visa®, Mastercard®, Discover® and American Express® – serve as the connection between the merchant’s bank and the consumer's card-issuing bank.
Today, many stores offer both open and closed loop cards.
Open Loop
An open loop credit or debit card can be used to pay for purchases at any merchant or business. All cards that carry the Visa or Mastercard logo work on the open loop system.
Open loop payments are automatically processed through the network associated with the card, regardless of the:
- Merchant
- Processor
- Customer
- Bank
Closed Loop
Cards issued by merchants, like store-specific credit cards and gift cards, run on a closed loop system.
This restricts usage of the credit, debit, or gift card to businesses and merchants within that system. However, the advantages of this approach are that:
- Merchants can benefit from lower transaction costs and increased customer loyalty
- Cardholders can receive more targeted offers based on purchases and spending
Examples of Closed Loop Cards:
There are many different methods of payment that fall into this closed loop category. Below are three of the most popular types:
- Store-specific cards offered by big-box merchants like Target and Macy’s
- Brand-specific cards offered by brands under a single corporate umbrella. For example, The Gap offers a card that can be used at all three of its brands: The Gap, Old Navy, and Banana Republic
- Private-issue cards such as American Express and Discover. Although both are widely accepted, they process their own payments instead of relying on the card networks
What Is a Payment Method, and Why Should You Care?
In October 2010, First Data launched “Payment Methods 101,” a first-of-its-kind educational resource for the payments industry.
Our goal was to provide relevant stakeholders with:
- A better understanding of what a payment method is
- A basic overview of the credit and debit card markets
- Insights into the trends and issues affecting the industry
Since then, that publication has been downloaded thousands of times and inspired numerous imitations. Yet with so many changes in the industry, we felt it necessary to publish an updated version of our payment processing overview.
Inside, you’ll find insightful information on the history of payments, as well as an in-depth look at:
- How Americans pay today
- The current trends in payments
- Critical issues affecting the industry
- The future of debit and credit card payments
The revised payment processing overview also features an exhaustive glossary of key terms and concepts.
Consider it your go-to resource when developing new payment acceptance strategies that help:
- Prevent payment fraud
- Meet customer expectations
- Grow your business
Understanding the Changing Landscape of Payment Methods
“Cash, check, debit or credit?”
For more than 50 years, these were the only four payment methods available to the U.S. consumers. They just chose the best option based on personal preference and how they were making the purchase, whether:
- In person
- By phone
- Via mail
In 1991, the World Wide Web completely disrupted the way consumers shopped, creating a need for remote, online payment processing (i.e., eCommerce1).
Since then, the pace of change has only accelerated.
Today, consumers can choose from a range of shopping channels and different methods of payment to buy the products and services they need.
