How transactions are processed
To understand Visa’s (V) business better, investors should know what happens when a customer uses a Visa card or product to make a payment. A typical Visa transaction involves four parties:
- The merchant is any entity, like a restaurant, store, or online retailer, that accepts Visa products as payment.
- The acquirer is a financial institution that enlists merchants to accept Visa payments. The acquirer ensures merchants get paid for each transaction.
- The issuer is a financial institution that provides Visa-branded cards to customers. When a Visa-branded credit card is used, the issuer lends the consumer the funds to complete the transaction. Examples of issuers include banks like JP Morgan or Citigroup.
- The account holder is the customer using a Visa card or other payment product to make purchases.
When account holders use their card to make a payment, the transaction process begins. The transaction information is transmitted electronically to the acquirer and routed through Visa’s network to the issuer for authorization. Once authorized, the acquirer submits a file containing the final transaction data, and it is processed for final settlement between the issuer and acquirer. The above figure shows the steps involved in a typical transaction.
Visa’s open-loop payments network connects and manages the exchange of information between issuers and acquirers. Visa doesn’t earn revenues from interest or fees from account holders on Visa-branded cards or payment products.
Banks such as JP Morgan (JPM), Bank of America (BAC), and Citigroup (C) issue open-loop cards. The issuing banks provide the credit for purchases on these cards, whereas payments networks such as Visa and MasterCard (MA) settle the transactions.