How Credit Cards and Digital Payment Systems Work

Marcelo Serafim
2 days ago
4 min read

Credit cards and digital payment systems have revolutionized the way people pay for goods and services. They make transactions faster, more convenient, and often more secure than cash. Understanding how they work is essential in today’s increasingly cashless society.

When a consumer uses a credit card, the process starts with the cardholder presenting the card to a merchant. The merchant’s payment terminal or online checkout system sends the card information to a payment processor. This data includes the card number, expiration date, and sometimes a security code.

The payment processor communicates with the cardholder’s issuing bank through a card network such as Visa, Mastercard, or American Express. The issuing bank checks whether the account is valid, whether the cardholder has sufficient credit, and whether there are any fraud alerts on the card.

If the transaction is approved, an authorization code is sent back through the network to the merchant. This entire process happens within seconds, even though it involves multiple institutions. The customer walks away with the purchase, but the actual settlement of funds happens later.

Settlement refers to the transfer of money from the cardholder’s bank to the merchant’s bank. Merchants typically receive the funds in one to three business days. However, they pay a fee—known as the merchant discount rate—for using the card payment system. This fee compensates the banks and networks for their roles in processing transactions.

Digital payment systems, such as PayPal, Apple Pay, or Google Pay, operate on similar principles but often use tokenization. Instead of transmitting actual card details, they send a digital “token” to protect sensitive information. This adds an extra layer of security against fraud.

Another key feature of digital payments is their integration with mobile devices and apps. Contactless technology, such as Near Field Communication (NFC), allows consumers to tap their phones or smartwatches on payment terminals. This eliminates the need to carry physical cards and enhances convenience.

Credit cards also provide additional features like rewards programs, cashback, and purchase protection. These benefits encourage consumer loyalty while giving banks opportunities to earn interest from unpaid balances. Digital payment systems, on the other hand, focus more on seamless transactions, speed, and integration with e-commerce.

Security remains one of the most important aspects of both credit cards and digital payments. Fraud detection systems use algorithms and artificial intelligence to monitor suspicious activity. Consumers are also protected by regulations that limit their liability in cases of unauthorized transactions.

In conclusion, credit cards and digital payment systems are not just tools for spending money. They are complex financial infrastructures that rely on banks, networks, and technology to ensure fast, secure, and efficient transactions. As digital wallets and mobile payments expand, the future of financial transactions will likely become even more cashless and digital.

Questions

What role does the issuing bank play in a credit card transaction?
How does tokenization improve the security of digital payments?
Why do merchants pay a fee for accepting credit card payments?
What technology allows smartphones to make contactless payments?
In what ways do credit cards and digital payments differ in terms of benefits and focus?

Vocabulary

Revolutionized – completely changed in a dramatic way.
Processor – a company that handles electronic payment transactions.
Authorization – official approval for a transaction to take place.
Settlement – the final transfer of money between banks after a transaction.
Tokenization – replacing sensitive data with a secure digital placeholder.
Fraud – wrongful or criminal deception intended for financial gain.
Integration – combining different systems so they work together smoothly.
Contactless – a type of payment where no physical contact is needed between card/device and terminal.
Algorithms – step-by-step procedures used by computers to solve problems or detect patterns.
Infrastructure – the underlying system or structure that supports a service.

Phrasal Verb

Carry out – to perform or complete a task or process.

Example 1: The bank carries out fraud checks on every transaction.
Example 2: Merchants must carry out settlement procedures daily.
Example 3: Digital wallets carry out payments without using physical cards.

American Idiom

Foot the bill – to pay for something, especially when it is expensive.

Meaning: To take responsibility for paying.
Example: Even though the merchant pays a transaction fee, customers are the ones who ultimately foot the bill through higher prices.

English Grammar Tip

Difference between Present Simple and Present Continuous

Present Simple is used for regular actions or general truths.
Present Continuous is used for actions happening right now or temporary situations.

Examples related to the text:

Present Simple: The bank checks the customer’s balance before approving a purchase.
Present Continuous: More consumers are using digital wallets every year.

Listening

Homework Proposal

Write a short essay (150–200 words) explaining how you usually pay for things in your daily life. Compare the use of cash, credit cards, and digital payments. Mention advantages and disadvantages of each method. Try to use at least three of the vocabulary words, one phrasal verb, and the idiom foot the bill in your essay.

MASERA