How do card payments work?

Making a small purchase with a contactless card these days usually requires simply holding your card over a card machine “contactless” sensor. Information encoding on your card chip informs the card machine authorising that you want to make the purchase. Every-so-often you may be asked to insert your card and enter your PIN as an extra security check.

At this point, the card payment service prover tells the card scheme (Visa) that you made a card payment. Since many people and shops use the same banks, Visa needs to know how much the individual banks owe each other at the end of the day and then work out the difference. This process avoids having to make thousands of transactions throughout the day. This is a process is called “settlement”.

Each day the card schemes inform the Bank of England about the card transactions and how to apportion the small percentage of each payment that should be shared with the card payment services providers. The card payment providers can then send the money for your purchase to the merchant from your bank account.

For other types of payment, online purchases and higher-value transactions the process differs – your bank would need to especially authorise the payment.

Behind the Scenes on Card Payments

Card schemes like VISA are Financial Market Infrastructures or FMIs, there are other types of FMI, sepcialising in different types of electronic payments, BACS you might have heard of for example.

Essentially FMIs are the networks that allow financial transactions to take place and can be thought-of as the plumbing of the financial system. Many companies and individuals use FMIs on a daily basis, companies paying salary or pension payments into our bank accounts, or individuals taking cash out of a cash machine or paying for something online.

Because of their importance to the smooth functioning of the financial system, the Bank of England regulates certain FMIs to help make sure they are operating safely. We look at whether those in charge of the FMIs have the right skills, and we check to make sure that their operations are sound. – the Bank of England.