Transaction Lifecycle Overview
Every card transaction follows a predictable lifecycle from the moment a card is swiped until the merchant receives funds. Understanding this lifecycle is critical for anyone building or operating payment systems.
Overview
A card transaction moves through three distinct phases:
| Phase | Timing | What Happens |
|---|---|---|
| Authorization | 1-3 seconds | Real-time approval/decline decision |
| Capture/Clearing | End of day (batch) | Transaction details exchanged for settlement |
| Funding/Settlement | T+1 to T+3 days | Actual money movement between parties |
┌─────────────────────────────────────────────────────────────────────────────┐
│ TRANSACTION LIFECYCLE OVERVIEW │
└─────────────────────────────────────────────────────────────────────────────┘
PHASE 1 PHASE 2 PHASE 3
AUTHORIZATION CLEARING FUNDING
(Real-time) (Batch/EOD) (T+1 to T+3)
│ │ │
▼ ▼ ▼
┌─────────────┐ ┌─────────────┐ ┌─────────────┐
│ Approve │ │ Submit │ │ Money │
│ or │─────────▶│ Batch │─────────▶│ Moves │
│ Decline │ │ Files │ │ │
└─────────────┘ └─────────────┘ └─────────────┘
"Can this "Here are the "Transfer the
transaction transactions funds between
proceed?" from today" accounts"
Phase 1: Authorization
Authorization is the real-time process of getting approval for a transaction. This happens in 1-3 seconds.
Step-by-Step Authorization Flow
AUTHORIZATION FLOW (1-3 seconds)
═══════════════════════════════════════════════════════════════════════
CARDHOLDER MERCHANT ACQUIRER NETWORK ISSUER
│ │ │ │ │
│ 1. Present Card │ │ │ │
│ (tap/swipe/dip) │ │ │ │
│─────────────────▶│ │ │ │
│ │ │ │ │
│ │ 2. Send Auth │ │ │
│ │ Request │ │ │
│ │─────────────────▶│ │ │
│ │ │ │ │
│ │ │ 3. Route to │ │
│ │ │ Network │ │
│ │ │────────────────▶│ │
│ │ │ │ │
│ │ │ │ 4. Route to │
│ │ │ │ Issuer │
│ │ │ │───────────────▶│
│ │ │ │ │
│ │ │ │ │ 5. Issuer
│ │ │ │ │ Checks:
│ │ │ │ │ • Balance
│ │ │ │ │ • Fraud
│ │ │ │ │ • Card status
│ │ │ │ │ • Limits
│ │ │ │ │
│ │ │ │ 6. Response │
│ │ │ │◀───────────────│
│ │ │ │ (Approved │
│ │ │ 7. Response │ or Declined)
│ │ │◀────────────────│ │
│ │ 8. Response │ │ │
│ │◀─────────────────│ │ │
│ 9. "Approved" │ │ │ │
│◀─────────────────│ │ │ │
│ │ │ │ │
Data Transmitted During Authorization
┌─────────────────────────────────────────────────────────────────────────────┐
│ AUTHORIZATION REQUEST MESSAGE │
├─────────────────────────────────────────────────────────────────────────────┤
│ │
│ CARD DATA TRANSACTION DATA │
│ ───────── ──────────────── │
│ • PAN (Card Number) • Amount │
│ • Expiration Date • Currency Code │
│ • CVV/CVC (if CNP) • Date/Time │
│ • Track Data (if CP) • Transaction Type │
│ • EMV Chip Data (if chip) • Entry Mode (swipe/dip/tap/keyed) │
│ │
│ MERCHANT DATA TERMINAL DATA │
│ ───────────── ───────────── │
│ • Merchant ID (MID) • Terminal ID │
│ • Merchant Category Code (MCC) • Terminal Capability │
│ • Merchant Name • POS Condition Code │
│ • Merchant Location • Card Sequence Number │
│ │
│ ADDITIONAL DATA (varies) │
│ ─────────────────────── │
│ • AVS Data (billing address) • 3D Secure results │
│ • Level 2/3 Data (B2B) • Recurring indicator │
│ │
└────────────────────────────────────────────────────────────────────── ───────┘
What the Issuer Checks
When the issuer receives an authorization request, they evaluate:
┌─────────────────────────────────────────────────────────────────────────────┐
│ ISSUER AUTHORIZATION CHECKS │
├─────────────────────────────────────────────────────────────────────────────┤
│ │
│ 1. CARD VALIDITY │
│ □ Is the card number valid? │
│ □ Is the card not expired? │
│ □ Is the card not blocked/cancelled? │
│ □ Is the CVV correct? (if provided) │
│ │
│ 2. ACCOUNT STATUS │
│ □ Is the account in good standing? │
│ □ Is there sufficient available credit/balance? │
│ □ Is the account not frozen? │
│ │
│ 3. FRAUD ANALYSIS │
│ □ Does location match cardholder patterns? │
│ □ Is amount consistent with spending history? │
│ □ Are there velocity concerns (many txns quickly)? │
│ □ Is MCC consistent with cardholder behavior? │
│ □ Risk score from fraud models │
│ │
│ 4. CARD RESTRICTIONS │
│ □ Is this merchant category allowed? │
│ □ Is international usage allowed? (if cross-border) │
│ □ Is online usage allowed? (if CNP) │
│ □ Are spending limits respected? │
│ │
└─────────────────────────── ──────────────────────────────────────────────────┘
Authorization Response Codes
When the issuer responds, they send a response code:
| Code | Name | Meaning | Action |
|---|---|---|---|
| 00 | Approved | Transaction authorized | Proceed with sale |
| 05 | Do Not Honor | Generic decline | Ask for another card |
| 14 | Invalid Card Number | PAN failed validation | Check card number |
| 41 | Lost Card | Card reported lost | Retain card if possible |
| 43 | Stolen Card | Card reported stolen | Retain card if possible |
| 51 | Insufficient Funds | Not enough balance/credit | Ask for another card |
| 54 | Expired Card | Card past expiration | Ask for another card |
| 57 | Transaction Not Permitted | Card restrictions | Try different card |
| 61 | Exceeds Withdrawal Limit | Over daily limit | Try smaller amount |
| 65 | Activity Limit Exceeded | Velocity limit hit | Wait and retry |
| 91 | Issuer Unavailable | System down | Retry later |
Authorization Hold vs Actual Charge
┌─────────────────────────────────────────────────────────────────────────────┐
│ AUTHORIZATION HOLD vs ACTUAL CHARGE │
├─────────────────────────────────────────────────────────────────────────────┤
│ │
│ AUTHORIZATION HOLD ("Auth Only") │
│ ──────────────────────────────── │
│ • Reserves funds on the card but does NOT transfer money │
│ • Reduces available credit/balance immediately │
│ • Appears as "pending" on cardholder statement │
│ • NO interchange is charged yet │
│ • Must be captured later to complete the transaction │
│ │
│ CAPTURE ("Auth + Capture" or "Sale") │
│ ───────────────────────────────────── │
│ • Completes the transaction │
│ • Tells the issuer: "This transaction is final, move the money" │
│ • Interchange fees are calculated │
│ • Transaction included in settlement │
│ │
│ WHY SEPARATE? │
│ ────────────── │
│ • Hotels: Auth at check-in, capture at checkout (final amount may vary) │
│ • Gas pumps: Auth for $150, capture actual pump amount ($45) │
│ • E-commerce: Auth at order, capture at shipment │
│ • Restaurants: Auth for meal, capture with tip added │
│ │
└─────────────────────────────────────────────────────────────────────────────┘
Authorization Validity Periods
Authorizations don't last forever. If not captured, they expire:
| Transaction Type | Visa Auth Validity | Mastercard Auth Validity |
|---|---|---|
| Standard retail | 7 days | 7 days |
| Card-not-present | 7 days | 7 days |
| Hotels/Lodging | 31 days | 30 days |
| Car rental | 31 days | 30 days |
| Cruise lines | 31 days | 30 days |
| Delayed delivery (e-commerce) | 30 days | 30 days |
| Recurring/subscription | Special rules | Special rules |
3D Secure Impact
While authorization typically takes 1-3 seconds, 3D Secure (Verified by Visa, Mastercard SecureCode) can add 5-20 seconds for CNP transactions requiring step-up authentication.
What happens when auth expires?
- The hold drops off the cardholder's account
- Merchant can still capture, but risk of decline increases
- May result in a "late presentment" fee
- Issuer may decline if cardholder's available credit changed
Phase 2: Capture and Clearing
After authorization, transactions must be captured and cleared before money can move.
What is Capture?
┌─────────────────────────────────────────────────────────────────────────────┐
│ WHAT IS CAPTURE? │
├─────────────────────────────────────────────────────────────────────────────┤
│ │
│ CAPTURE = "Finalize this transaction for settlement" │
│ │
│ When a merchant CAPTURES a transaction, they're saying: │
│ • "This sale is complete" │
│ • "Please include this in settlement" │
│ • "Transfer the money from cardholder to me" │
│ │
│ CAPTURE TIMING BY BUSINESS TYPE: │
│ ──────────────────────────────── │
│ │
│ Retail Store (CP): │
│ • Auth + Capture usually combined in single message │
│ • "Sale" transaction = auth and capture together │
│ │
│ E-commerce (CNP): │
│ • Auth at checkout (card validated, funds held) │
│ • Capture at shipment (goods dispatched to customer) │
│ • Gap can be hours to days │
│ │
│ Restaurant: │
│ • Auth for meal amount │
│ • Capture after tip added (different amount) │
│ │
│ Hotel: │
│ • Pre-auth at check-in (estimated stay) │
│ • Capture at checkout (final bill) │
│ │
└─────────────────────────────────────────────────────────────────────────────┘
Batch Processing
Merchants typically don't send each capture individually. They batch them.
┌────────── ───────────────────────────────────────────────────────────────────┐
│ BATCH PROCESSING │
├─────────────────────────────────────────────────────────────────────────────┤
│ │
│ Throughout the day, merchant processes transactions: │
│ │
│ 9:15 AM │ Auth+Capture │ $45.00 │ Visa │ ████████4521 │
│ 10:30 AM │ Auth+Capture │ $127.50 │ MC │ ████████8832 │
│ 11:45 AM │ Auth+Capture │ $23.00 │ Visa │ ████████1199 │
│ 1:00 PM │ Auth+Capture │ $89.99 │ Amex │ ████████5544 │
│ 2:30 PM │ Auth+Capture │ $156.00 │ Visa │ ████████7766 │
│ 4:15 PM │ Auth+Capture │ $34.50 │ MC │ ████████2211 │
│ ... │ ... │ ... │ ... │ ... │
│ │
│ END OF DAY - BATCH CUTOFF TIME: │
│ ─────────────────────────────── │
│ │
│ Cutoff times vary by processor and location: │
│ • East Coast merchants: typically 11:00 PM ET │
│ • West Coast merchants: 8:00 PM PT (11:00 PM ET) │
│ • Some processors: 6:00 PM local time │
│ • Enterprise merchants: Negotiated (can be midnight or later) │
│ │
│ IMPORTANT: Transaction timing affects funding! │
│ • 10:00 PM Friday (before cutoff) → Monday/Tuesday funding │
│ • 11:30 PM Friday (after cutoff) → Tuesday/Wednesday funding │
│ │
│ │
│ ┌─────────────────────────────────────────────────────────────────────┐ │
│ │ BATCH SETTLEMENT │ │
│ │ │ │
│ │ Total Transactions: 47 │ │
│ │ Total Volume: $4,521.75 │ │
│ │ │ │
│ │ By Network: │ │
│ │ • Visa: 28 txns $2,890.25 │ │
│ │ • Mastercard: 15 txns $1,342.50 │ │
│ │ • Amex: 4 txns $289.00 │ │
│ │ │ │
│ │ Status: SUBMITTED TO PROCESSOR │ │
│ └─────────────────────────────────────────────────────────────────────┘ │
│ │
│ WHAT HAPPENS AFTER BATCH CLOSES: │
│ ───────────────────────────────── │
│ 1. Processor receives batch file from merchant │
│ 2. Processor sorts transactions by card network │
│ 3. Processor submits to each network (Visa, MC, etc.) │
│ 4. Networks route to respective issuers │
│ 5. Settlement calculated (who owes whom) │
│ │
└─────────────────────────────────────────────────────────────────────────────┘
The Clearing Process
CLEARING PROCESS
═══════════════════════════════════════════════════════════════════════
MERCHANT PROCESSOR NETWORK ISSUER
│ │ │ │
│ 1. Submit Batch │ │ │
│ (all day's txns) │ │ │
│───────────────────▶│ │ │
│ │ │ │
│ │ 2. Format & │ │
│ │ Submit to │ │
│ │ Networks │ │
│ │──────────────────▶│ │
│ │ │ │
│ │ │ 3. Calculate │
│ │ │ Net Positions │
│ │ │ & Route to │
│ │ │ Issuers │
│ │ │───────────────────▶│
│ │ │ │
│ │ │ │ 4. Issuer
│ │ │ │ converts
│ │ │ │ auth to
│ │ │ │ posted
│ │ │ │ charge
│ │ │ │
│ │ │ 5. Settlement │
│ │ │ Instructions │
│ │ │◀───────────────────│
│ │ │ │
│ │ 6. Funding │ │
│ │ Instructions │ │
│ │◀──────────────────│ │
│ │ │ │
KEY CLEARING ACTIVITIES:
• Transactions matched to original authorizations
• Interchange fees calculated based on card type, MCC, etc.
• Network assessment fees calculated
• Net settlement positions determined
• Cardholder statements updated (pending → posted)
Phase 3: Funding (Settlement)
Funding is when actual money moves between bank accounts.
Net Settlement Process
┌─────────────────────────────────────────────────────────────────────────────┐
│ NET SETTLEMENT PROCESS │
├─────────────────────────────────────────────────────────────────────────────┤
│ │
│ Rather than moving money for each transaction, networks calculate │
│ NET POSITIONS and settle the difference. │
│ │
│ EXAMPLE - Single Day's Activity: │
│ ───────────────────────────────── │
│ │
│ ISSUER A (Chase) processed: │
│ • $1,000,000 in cardholder purchases (owes acquirers) │
│ • $200,000 in merchant sales to their merchants (owed by acquirers) │
│ • Net Position: OWES $800,000 │
│ │
│ ACQUIRER B (Wells Fargo) processed: │
│ • $500,000 in merchant sales (owed by issuers) │
│ • $100,000 in cardholder purchases (owes issuers) │
│ • Net Position: OWED $400,000 │
│ │
│ NETWORK CALCULATES: │
│ ┌─────────────────────────────────────────────────────────────────────┐ │
│ │ │ │
│ │ Chase owes $800,000 total │ │
│ │ Wells Fargo owed $400,000 │ │
│ │ [Other parties make up the difference] │ │
│ │ │ │
│ │ Settlement: Chase wire transfers funds to network │ │
│ │ Network distributes to Wells Fargo and others │ │
│ │ │ │
│ └─────────────────────────────────────────────────────────────────────┘ │
│ │
│ WHY NET SETTLEMENT? │
│ ─────────────────── │
│ • Moving $10M net is cheaper than moving $500M gross │
│ • Reduces counterparty risk │
│ • More efficient use of capital │
│ │
└─────────────────────────────────────────────────────────────────────────────┘
Funding Timelines
┌─────────────────────────────────────────────────────────────────────────────┐
│ FUNDING TIMELINES │
├─────────────────────────────────────────────────────────────────────────────┤
│ │
│ TERMINOLOGY: │
│ • T = Transaction Date │
│ • T+1 = One business day after transaction │
│ • T+2 = Two business days after transaction │
│ │
│ TYPICAL FUNDING SCHEDULES: │
│ ────────────────────────── │
│ │
│ ┌───────────────┬─────────────┬───────────────────────────────────────┐ │
│ │ Merchant Type │ Funding │ Notes │ │
│ ├───────────────┼─────────────┼───────────────────────────────────────┤ │
│ │ Large retail │ T+1 │ Next business day │ │
│ │ Standard │ T+2 │ Two business days │ │
│ │ E-commerce │ T+2 to T+3 │ Higher risk = longer hold │ │
│ │ High-risk │ T+3 to T+7 │ Extended holds, reserves │ │
│ │ New merchant │ T+3 to T+7 │ Until processing history established │ │
│ └───────────────┴─────────────┴───────────────────────────────────────┘ │
│ │
│ EXAMPLE TIMELINE: │
│ ───────────────── │
│ │
│ Monday: Customer purchases $100 (authorization) │
│ Monday: Merchant batches transactions at end of day (capture) │
│ Tuesday: Clearing process runs overnight │
│ Wednesday: Merchant receives $97.50 (T+2 funding) │
│ │
│ WEEKEND/HOLIDAY IMPACT: │
│ ─────────────────────── │
│ Friday batch → Monday clearing → Tuesday/Wednesday funding │
│ Saturday/Sunday transactions → Monday batch → Tuesday clearing │
│ │
└─────────────────────────────────────────────────────────────────────────────┘
How Fees Are Deducted
┌─────────────────────────────────────────────────────────────────────────────┐
│ FEE DEDUCTION DURING FUNDING │
├─────────────────────────────────────────────────────────────────────────────┤
│ │
│ Merchants receive NET deposits - fees are already deducted. │
│ │
│ EXAMPLE: $10,000 in Daily Sales │
│ ───────────────────────────────── │
│ │
│ Gross Sales: $10,000.00 │
│ │
│ Less: Interchange Fees (avg 1.80%) -$180.00 │
│ Less: Network Assessments (0.14%) -$14.00 │
│ Less: Processor/Acquirer Markup (0.50%) -$50.00 │
│ Less: Per-Transaction Fees (47 × $0.10) -$4.70 │
│ ────────── │
│ Total Fees: -$248.70 (2.49%) │
│ │
│ NET DEPOSIT TO MERCHANT: $9,751.30 │
│ │
│ │
│ FEE COLLECTION METHODS: │
│ ─────────────────────── │
│ │
│ 1. NET SETTLEMENT (most common) │
│ • Fees deducted from each deposit │
│ • Merchant receives net amount │
│ │
│ 2. GROSS + MONTHLY BILLING │
│ • Merchant receives gross deposits │
│ • Fees billed monthly via ACH debit │
│ • More common for large merchants │
│ │
│ 3. DAILY DISCOUNT │
│ • Percentage fee deducted daily │
│ • Per-transaction fees billed monthly │
│ │
└─────────────────────────────────────────────────────────────────────────────┘
Key Terms Defined
| Term | Definition |
|---|---|
| Authorization | Real-time process of getting approval from the issuer for a transaction. Results in a hold on funds but no money movement. |
| Authorization Hold | A temporary hold placed on cardholder funds that reduces available credit/balance. Not an actual charge. |
| Capture | The process of finalizing an authorized transaction for settlement. Tells the issuer to convert the hold to an actual charge. |
| Batch | A group of transactions submitted together for settlement, typically at end of business day. |
| Clearing | The process of exchanging transaction details between acquirers and issuers through the card network to calculate settlement amounts. |
| Settlement | The actual transfer of funds between financial institutions to fulfill payment obligations. |
| Funding | When the merchant's bank account receives the net proceeds from settled transactions. |
| T+1, T+2 | Settlement timing notation. T = transaction date. T+1 = one business day after transaction. |
Related Topics
- The Four-Party Model - Participants and interchange economics
- Card Network Role - Network rules, routing, and assessment fees
- Debit Networks & Routing - PIN vs signature debit
- Payment Processors - Processing infrastructure
- Payment Gateways - Tokenization and security