Online credit card transaction
Card-based payment processing over networks.
5-mark Exam Answer
An online credit card transaction is processed much like an in-store purchase, except the merchant never sees the card and no signature is available, making it a Cardholder Not Present (CNP) transaction. According to Laudon and Traver, five parties are involved: consumer, merchant, clearinghouse, merchant bank, and card-issuing bank.
- 1.Five parties: consumer, merchant, clearinghouse, merchant bank, issuer
- 2.CNP transaction — resembles MOTO
- 3.SSL/TLS secures the session
- 4.Clearinghouse authenticates and verifies
- 5.Merchant account required to accept cards
Online credit card transactions are processed in much the same way that in-store purchases are, with the major differences being that online merchants never see the actual card being used, no card impression is taken, and no signature is available. These purchases are called Cardholder Not Present (CNP) transactions and are the major reason that charges can be disputed later by consumers.
There are five parties involved: consumer, merchant, clearinghouse, merchant bank (the 'acquiring bank'), and the consumer's card-issuing bank. Merchants must have a merchant account — a bank account that allows companies to process credit card payments and receive funds from those transactions.
An online transaction begins with a purchase. When the consumer wants to pay, a secure tunnel is created using SSL/TLS, which secures the session during which credit card information will be sent to the merchant. SSL/TLS does not authenticate either the merchant or the consumer — the transacting parties have to trust one another.
Once the merchant receives the card information, the software contacts a clearinghouse, which contacts the issuing bank to verify the account. Once verified, the issuing bank credits the merchant's account at the merchant bank (usually in a nightly batch process), and the debit to the consumer is transmitted in a monthly statement.
Buying a book on Amazon: the shopper's card details travel over SSL/TLS to Amazon, which contacts a clearinghouse via a gateway like Authorize.net; the clearinghouse verifies with the issuing bank; Amazon is credited and the shopper is billed monthly.
Online credit card transactions involve five parties and rely on SSL/TLS, clearinghouses, and merchant accounts, but their CNP nature creates security, merchant-risk, cost and equity limitations.
The exam interface follows the university paper pattern: Section A & B carry 5-mark questions; Section C carries objective questions.