1. Introduction to Electronic Processing College of General Studies

2. 2 Agenda n Industry overview n Consumer products n Players - roles & responsibilities n “A Day in the Life of a Transaction” n Seven stages of processing

3. 3 $4.7 Trillion$7.0 Trillion$8.3 Trillion 1994 Visa Checks 57.6% Cash 18.6% Other Cards Other General Purpose Cards 6.0% 6.6% 5.9% 5.3% Other* 20012003 *Money Orders, TCs, Food Stamps, Preauth and Remote Payments Source: BEA, Nilson Report, and Visa Estimates Personal Consumption Visa Checks 48.7% Cash 16.0% Other Cards Other General Purpose Cards 12.1% 10.0% 4.6% 8.7% Other* Visa Checks 45.4% Cash 15.0% Other Cards Other General Purpose Cards 13.9% 11.0% 5.8% 8.9% Other*

4. 4 Consumer Products - Payment n Credit cards – Classic – Commercial – Proprietary n Debit cards – Classic – Gift – EBT n Checks

5. 5 Consumer Products - Marketing/Value Add n Loyalty/frequency n Smart cards/chip cards n Contactless – Wireless – Radio frequency

6. 6 Consumer Products - Authentication n Personal Identification Number (PIN) n Smart cards/chip cards n Biometrics n Age verification n Address Verification

7. 7 Credit Cards vs. Debit Cards Credit n Credit balance “open to buy” n Promise to pay n Bank Loan n Billed monthly n Signature required Debit n Checking/savings account balance n Reserved funds n Consumer owned n Subtracted daily n PIN or signature required

8. 8 Key Debit Statistics n Nearly 140 million Visa check cardholders n Over $400 billion in annual volume – 7 billion annual transactions n Significant cardholder loyalty – Cardholders prefer debit to other payment methods for purchases of $20-$100 – Nearly two-thirds of users would switch banks to keep debit card Source: Visa Statistical Reports 6/03, Visa Debit Tracker 2002

9. 9 On-Line (PIN) vs. Off-Line (Signature) Debit On-Line n Guaranteed funds n PIN-based n Posting at time of authorization n Regional debit network rules Off-Line n Reserved funds n Signature-based n Authorization, clearing, then posting n Visa/MC rules

10. 10 Cardholder vs. Merchant Cardholder n Contract with Issuer n Buys goods/services n Cardholder promises to pay Issuer Merchant n Contract with Acquirer n Sells goods/services n Acquirer promises to pay Merchant

11. 11 Issuer vs. Acquirer Issuer n Contract with Consumer n Card issuance n Issues authentication and authorization n Pays Association (V/MC) n Reimbursed by Cardholder n Bills fees to Cardholder n Issuing BIN/ICA Acquirer n Contract with Merchant n Card acceptance n Requests authentication and authorization n Pays Merchant n Reimbursed by Association (V/MC) n Bills fees to Merchant n Acquiring BIN/ICA

12. 12 Visa/MasterCard vs. Other Cards V/MC = Association n VISA and MasterCard n Visa not for profit n Membership-based n Network of Issuers and Acquirers n Interchange system n Funds flow between Issuers and Acquirers Other = Independent n Amex, Discover, JCB n For profit n Wholly-owned n Single Issuer and Acquirer n Closed-loop system n Funds flow between Consumers and Merchants

13. 13 Hierarchy of Players Visa/MasterCard Associations Debit Card Networks Acquirers Merchants MLS Processors ISO/ MSP MLS Merchants

14. 14 Roles and Responsibilities n Visa and MasterCard Associations/Debit Card Networks – Provides infrastructure for Interchange, clearing and settlement – Monitor and produce guidelines for risk – Produce operating rules and regulations – Promote their brand recognition and acceptance – Provide statistical analysis – Develop new products, services, segments

15. 15 Roles and Responsibilities n Acquirer – The Association/Debit Card Network member – Carries ultimate liability for ISO and Merchant – May provide various levels of back office support – May also be a Processor – Third party to merchant contracts – Underwriting for ISO and Merchant

16. 16 Acquirer n Qualifications for membership – Regulated financial institution – Able to extend Credit or accept Checking and/or Savings Accounts – Asset size may not exceed risk – May sponsor agents/MSPs ISO, TPS, IC

17. 17 Roles and Responsibilities n ISO – Typically a sales organization – May provide various levels of back office support Customer service Request for Copy (RFC) paper pushing Chargeback paper pushing Statements and reporting Underwriting Risk monitoring

18. 18 Roles and Responsibilities n Processor (Front-End and Back-End) – Typically a transaction-based company – Provides connectivity to the Associations for authorization, clearing and settlement – Provides various levels of back office support

19. 19 Front-End vs. Back-End Processors Front-End n Terminals and POS interfaces n Authorization n Data capture n Merchant terminal balancing n Sends batch files to Back-End Processor n Technical support 24/7 n Base I/INAS Back-End n Multiple interfaces with Front-End Processors n Clear transaction (batch) into interchange n Creation of Merchant ACH n Chargeback and RFC processing n Risk monitoring n Merchant statements n Base II/INET

20. 20 “A Day in the Life of a Transaction” n Cardholder presents card to Merchant for payment n Merchant obtains authorization for sale n Merchant submits sale to Acquirer n Acquirer submits sale to Visa or MasterCard n Visa or MasterCard interchanges the sale and debits the Issuer and credits the Acquirer n Issuer bills Cardholder n Acquirer pays Merchant

21. 21 Seven Stages of Processing 1 - Authorization 2 - Merchant Balancing 3 - Capture 4 - Clearing 5 - Interchange 6 - Settlement 7 - Merchant ACH

22. 22 1 - Authorization n Merchant requests an authorization from the Front-End Processor n If Visa or MasterCard (V/MC), Front-End Processor transmits authorization to V/MC and transaction is further routed to appropriate Issuing BIN n Otherwise, Front-End Processor transmits authorization to appropriate card Issuer for approval (AX, DR, DC, JCB) n Issuer authenticates Cardholder and approves or declines the transaction amount

23. 23 Authorization Flow Issuer Front-End Processor Merchant Authorization Reduces Cardholder Open to Buy Merchant Makes Purchase Authorization 1 Visa Base I/ MasterCard Cardholder

24. 24 2 - Merchant Balancing n Merchant totals transactions and balances by card type n Merchant either transmits his batch to the Front-End Processor or terminal may perform an auto close function at end of day

25. 25 3 - Capture n Front-End Processor aggregates Merchant batches by Acquiring BIN n Front-End Processor matches authorization data to settlement data n Front-End Processor transmits card capture files to Back-End Processor n Front-End Processor may send other card type files directly to the associated card company (AX, DR, DC, JCB)

26. 26 4 - Clearing n Back-End Processor loads the file and checks for any rejected transactions for invalid Issuing BIN or unknown account number (check-digit) n Back-End Processor performs compliance checks and interchange calculations n Back-End Processor performs risk management procedures and generates risk report n Back-End Processor formats the ACH deposit n Back-End Processor formats daily records for Merchant statements n Back-End Processor produces reconciliation reports n Back-End Processor stages the files for Visa and MasterCard to pick up n Back-End Processor may transmit files for other card types to appropriate card company

27. 27 5 - Interchange (Visa and MC only) n Associations pick up files from Back- End Processor n Associations process the files on their systems to identify host returns for invalid Issuing BIN and transaction data related issues n Associations sort the transactions by Issuing BIN n Associations stage the file for the Issuer to pick up

28. 28 6 - Settlement n Calculate fees and deductions (i.e., chargebacks) n Determine the “daily net position” for the Merchant (all other card types) n Calculate interchange (Visa/MC only) n Determine the “daily net position” for both the Issuer and the Acquirer (Visa/MC only) n Debit the Issuer’s DDA for their daily net position (Visa/MC only) n Credit the Acquirer’s DDA for their daily net position (Visa/MC only) n Acquirer’s daily net position = net sales less: – Interchange – Chargebacks – Miscellaneous adjustments – Fees

29. 29 7 - Merchant ACH n Back-End Processor transmits Visa/MC Merchant deposit to ACH n Other card types transmit Merchant deposit to ACH n Merchant’s DDA is credited for daily net deposits

30. 30 Visa/MasterCard Interchange Transaction Processing Flow V/MC Acquirer Back-End Processor Front-End Processor ACH Issuer Merchant OR 2 Merchant Balancing 3 Capture 4 Clearing 7 Merchant ACH 6 Settlement 6 5 Interchange $$$ Flow Other Card Data Visa/MasterCard Data

31. 31 Debit Card Networks Pin Based Debit Processing Flow Debit Card Acquirer Front-End Processor ACH Issuer Merchant 1 Authorization 2 Capture 4 Merchant ACH 3 Settlement

32. 32 Summary n Basic definition and terminology n Players and their roles and responsibilities n Seven stages of processing n “A Day in the Life of a Transaction”

33. Introduction to Electronic Processing College of General Studies