Transaction Flows in the Four-Party Model
Last Updated: 2025-12-18
Status: Complete
This document details the technical flows of transactions through the four-party model.
Authorization Flow (Milliseconds to Seconds)
AUTHORIZATION FLOW
═════════════════════════════════════════════════════════ ══════════════════════
CARDHOLDER MERCHANT ACQUIRER NETWORK ISSUER
│ │ │ │ │
│ 1. Tap/Swipe │ │ │ │
│─────────────────▶│ │ │ │
│ │ 2. Auth Request │ │ │
│ │─────────────────▶│ │ │
│ │ │ 3. Route Auth │ │
│ │ │────────────────▶│ │
│ │ │ │ 4. Verify & │
│ │ │ │────────────────▶
│ │ │ │ Approve │
│ │ │ │◀────────────────
│ │ │ 5. Response │ │
│ │ │◀────────────────│ │
│ │ 6. Approval │ │ │
│ │◀─────────────────│ │ │
│ 7. Confirmed │ │ │ │
│◀─────────────────│ │ │ │
│ │ │ │ │
Typical Latency:
• Optimal: 300-800ms
• Acceptable: 1-2 seconds
• Poor: 3+ seconds (network congestion or issuer delays)
Authorization vs Capture vs Settlement
Many transactions involve multiple steps that are often confused:
┌─────────────────────────────────────────────────────────────────────────────┐
│ AUTHORIZATION → CAPTURE → CLEARING → SETTLEMENT │
├───────────────────────────────────────────────── ────────────────────────────┤
│ │
│ 1. AUTHORIZATION (Real-time) │
│ ─────────────────────────── │
│ • Issuer approves transaction and places HOLD on funds │
│ • No money moves yet │
│ • Hold typically lasts 7-30 days (issuer-dependent) │
│ │
│ 2. CAPTURE (Same day or later) │
│ ───────────────────────────── │
│ • Merchant "captures" the authorized amount │
│ • Can be less than authorized amount │
│ • Signals intent to collect funds │
│ │
│ 3. CLEARING (End of day) │
│ ───────────────────────── │
│ • Network calculates net positions between banks │
│ • Interchange fees determined │
│ • Transactions batched for settlement │
│ │
│ 4. SETTLEMENT (T+1 to T+3) │
│ ───────────────────────── │
│ • Actual money moves between banks │
│ • Merchant funded (minus fees) │
│ • Cardholder's statement updated │
│ │
└─────────────────────────────────────────────────────────────────────────────┘
Real-World Examples
| Scenario | Authorization | Capture | Why? |
|---|---|---|---|
| Restaurant | $50 (meal) | $60 (meal + tip) | Tip added after auth |
| Hotel | $500 (deposit) | $350 (actual stay) | Final amount lower |
| Gas station | $100 (pre-auth) | $45 (pumped) | Actual amount unknown upfront |
| E-commerce | $100 | $100 | Captured at shipping |
Key Point: If a merchant authorizes but never captures, the hold releases after the issuer's timeout period (typically 7-30 days). This can frustrate cardholders who see "pending" charges.
Settlement Flow
SETTLEMENT FLOW (T+1 to T+3)
════════════════════════════════════════════════════════════════════
ISSUER NETWORK ACQUIRER MERCHANT
│ │ │ │
│ │ │ 1. Batch Submit │
│ │ │◀─────────────────│
│ │ 2. Clearing │ │
│ │◀─────────────────│ │
│ 3. Net Position │ │ │
│◀─────────────────│ │ │
│ │ │ │
│ 4. Pay Acquirer │ │ │
│ (minus fees) │ │ │
│─────────────────────────────────────▶ │
│ │ │ 5. Pay Merchant │
│ │ │ (minus fees) │
│ │ │─────────────────▶│
│ │ │ │
Settlement Timing Varies
| Factor | Impact |
|---|---|
| Card type | Credit: T+1 to T+2; Debit: Often T+1 |
| Merchant risk | High-risk: T+5 to T+7 or rolling reserves |
| Batch timing | Batches after cutoff (5-6 PM EST) settle next cycle |
| Weekends/holidays | No settlement on non-business days |
Authorization Response Codes
When a transaction is processed, the issuer returns a response code:
Common Response Codes
| Code | Meaning | Recommended Action |
|---|---|---|
| 00 | Approved | Complete transaction |
| 05 | Do not honor | Generic decline, don't retry |
| 51 | Insufficient funds | Request alternate payment |
| 54 | Expired card | Request updated card |
| 55 | Incorrect PIN | Allow retry (max 3 attempts) |
| 57 | Transaction not permitted | Card restricted for this MCC |
| 59 | Suspected fraud | Do not retry, request alternate |
| 61 | Exceeds withdrawal limit | Try smaller amount or wait |
| 65 | Activity limit exceeded | Retry after 24h or call issuer |
| N7 | CVV mismatch | Re-enter CVV |
Key Point: Merchants receive only the response code, not the specific reason. This protects cardholder privacy. A "Do not honor" (05) could mean fraud, account closure, or issuer policy.
Soft Decline vs Hard Decline
| Type | Examples | Action |
|---|---|---|
| Soft decline | Insufficient funds, velocity limit | May retry later |
| Hard decline | Stolen card, account closed, fraud | Do NOT retry |
Transaction Timing Best Practices
Authorization Hold Periods
Different issuers have different hold periods:
| Card Type | Typical Hold Period | Notes |
|---|---|---|
| Credit cards | 7-30 days | Varies by issuer |
| Debit cards | 3-7 days | Shorter due to immediate funds impact |
| Prepaid cards | 3-5 days | Shortest holds |
Batch Cutoff Times
Most processors have daily batch cutoff times:
- Standard cutoff: 5-6 PM Eastern Time
- Late cutoff: Some processors offer 11 PM or midnight cutoffs
- Weekend/holiday: Batches held until next business day
Important: Batching after cutoff pushes settlement to the next cycle (T+2 instead of T+1).
Transaction States
Throughout the lifecycle, a transaction moves through distinct states:
┌──────────────────────────────────────────────────────────────────────────┐
│ TRANSACTION STATES │
├──────────────────────────────────────────────────────────────────────────┤
│ │
│ AUTHORIZED → CAPTURED → CLEARING → SETTLED → COMPLETED │
│ │
│ Alternative paths: │
│ AUTHORIZED → VOIDED (before capture) │
│ AUTHORIZED → EXPIRED (hold timeout) │
│ CAPTURED → REFUNDED (full or partial) │
│ SETTLED → CHARGEBACK (dispute initiated) │
│ │
└──────────────────────────────────────────────────────────────────────────┘
State Definitions
| State | Description | Money Movement |
|---|---|---|
| Authorized | Hold placed, awaiting capture | None (hold only) |
| Captured | Merchant claims funds | None yet |
| Clearing | Network calculating positions | None yet |
| Settled | Banks transfer funds | Merchant funded |
| Completed | Final state | Complete |
| Voided | Authorization canceled | Hold released |
| Expired | Authorization timeout | Hold released |
| Refunded | Funds returned to cardholder | Reversal |
| Chargeback | Disputed, under investigation | Funds reversed |
Key Takeaways
-
Authorization ≠ Settlement: Authorization is a promise; settlement is actual payment (T+1 to T+3)
-
Capture flexibility: Merchants can capture less than authorized (hotels, gas stations) but not more
-
Batch timing matters: Late batches delay settlement and may incur downgrades
-
Response codes protect privacy: Merchants only see codes, not detailed decline reasons
-
Soft vs hard declines: Only retry soft declines; hard declines indicate permanent issues
-
Hold periods vary: Credit cards hold longer (7-30 days) than debit (3-7 days)
-
Weekend/holiday impact: No settlement on non-business days
Related Topics
Four-Party Model Series:
- Four-Party Model Overview - Core concepts and party roles
- Fee Breakdown & Money Flow - Where fees go and why
- Interchange Optimization - Reducing costs through data
- PayFac Position - How PayFacs fit into the model
- Self-Assessment Quiz - Test your understanding
Deep Dives:
- Transaction Lifecycle - Complete transaction journey including disputes
- Card Network Role - Network infrastructure and routing
Continue reading: Fee Breakdown & Money Flow