Annex B. Simplified payment cycle
Note: This diagram shows a high-level overview of a simplified payment cycle in a typical online payment process. Granted, the payment landscape could be more complex and there may be variations of payment process models.
In an online payment process, a number of different parties are involved that may include the following:
Cardholder (i.e. customer): it is a person holding a debit or credit card issued by card issuer (i.e. issuing bank/customer’s bank).
Merchant (i.e. seller/underlying supplier): it is a vendor that sells goods and/or services to the customer.
Merchant acquirer (i.e. acquiring bank/merchant’s bank): it is a bank or a financial institution that processes the payment transaction on behalf of the merchant (e.g. Barclays).
Card scheme: card schemes manage the operation and clearing of payment transactions. Examples include American Express, Maestro, MasterCard, Visa, etc.
Card issuer (i.e. issuing bank/customer’s bank): card issuer is the bank or financial institution that provides debit or credit card to the cardholder.
Payment service provider (e.g. PayPal): it provides a ‘payment gateway’ services to securely take customer’s card details on a payment page and pass these onto the acquirer for processing.
Source: OECD analysis.
1. Cardholder (i.e. customer), either through a digital platform or directly, communicates his or her offer to purchase an item (i.e. goods and/or services) to the merchant (i.e. seller). Typically, the customer also inputs their card details for payment at this point.
2. After receiving the customer’s offer to purchase, the seller initiates an authorisation request that will be passed onto the card issuer (i.e. customer’s bank). Customer’s bank will confirm the authorisation and revert to the seller.
3. Once the seller receives authorisation [i.e. the time of supply/taxation for the purposes of the VAT/GST collection under the full VAT/GST liability regime], the seller accepts customer’s offer to purchase and delivers goods and/or services - the customer’s bank will place a hold on the amount of the purchase on the customer’s account. Concurrently, the seller will notify the digital platform of the confirmation of payment. The digital platform will also further pass on this confirmation to the customer.
4. The seller initiates the collection request. Customer’s bank transfers the funds to the merchant’s bank account. Subsequently, the customer’s bank will debit the transaction amount to the customer’s bank account.