How Online Card Payments work in Nigeria

Have you ever wondered how online payments work?

When you pay with your card online in Nigeria, how exactly does the money go from your bank account, into the bank account of the business?

In this simple write-up, you’ll learn how money moves through Nigeria’s payment systems. I’ll break down all the jargon and technical stuff into tangible examples, and you’ll find that you don’t need a background in finance or software development to follow along. It’s helpful to note that this write-up isn’t designed to be an exhaustive encyclopaedia of online payments. Rather, it’s a simplified guide that highlights only the most important things you need to know to be able to understand how online card payments work in Nigeria. If you’ve ever thought “I wonder how this stuff works!”, then this is for you, and i hope it’s as fun to read as it was to write!

I will discuss this in two parts. First;

Part 1: How a one-time online card payment works

An Example; Amina..

Amina wants to order a pizza from Marina Pizza. Marina Pizza also wants to make it as easy as possible to collect payment from Amina. To do this, Marina Pizza uses a Payment Service Provider (PSP) like Paystack to collect the payment online.

Over the next few pages, you’ll learn how the money moves from Amina’s bank account to Marina Pizza’s bank account.

A. Card data encryption

ENCRYPTION is the process of concealing data such that only authorised people can access it. It is one of the ways that payment service providers like Paystack keep your card details private and secure.

Amina goes to the Marina Pizza website and places an order. Since Marina Pizza has integrated with Paystack, Amina sees a Paystack checkout form. She enters her GTBank Visa card details into the checkout form, and Paystack immediately encrypts the data. In this transaction, GTBank is known as an issuing bank.

Paystack then sends the encrypted card details to a Card Association (eg. Visa, MasterCard, or Verve depending on Amina’s type of card) or to a Third Party Processor (eg. Interswitch, MasterCard Payment Gateway Service, etc).

B. Authorisation

AUTHORISATION is a process where a customer’s payment card is checked to ensure that they hold the necessary funds and approval required to make a purchase.

After the card encryption process, the Card Association forwards the card data to Amina’s bank for authorisation.

Amina’s bank receives the authorisation request and replies with an authorisation code that: − Confirms that Amina has enough money in her bank account to be debited

− Confirms that there are no debit restrictions placed on Amina’s bank account, either by Amina or the bank

− Gives an instruction that the cost of the pizza should be debited from Amina’s bank account if the first two conditions are met

The associated authorisation code works only for that one transaction, and cannot be used for subsequent orders that Amina makes.

C. Settlement

SETTLEMENT This is the process of moving money from the customer’s bank to the merchant’s bank to complete a transaction.

After the authorisation, Marina Pizza proceeds to deliver the pizza, and the settlement process begins. Settlement is simply the movement of money from a customer’s bank to a merchant or a Payment Service Provider’s acquiring bank. In this case, Amina’s bank settles Paystack by sending the money Amina paid to Paystack’s acquiring bank.

It takes 24 hours for the money to be settled into Paystack’s bank from Amina’s bank. Immediately after settlement is complete, Paystack transfers the money to Marina Pizza’s bank account.

And that’s it! With the settlement into Marina Pizza’s Bank account, the transaction is complete.

Below, you’ll see the complete transaction map for a one-time payment in Nigeria.

Summary

There are 7 main players involved when an online card payment is made in Nigeria.

− THE CUSTOMER the person making the online card payment

− THE ISSUING BANK the customers’ bank who issued the card used to make the payment − THE MERCHANT the business that the customer wants to pay

− THE PAYMENT SERVICE PROVIDER (PSP) the platform which allows the merchant to accept payments from their customers online

− THE CARD ASSOCIATION/THIRD PARTY PAYMENT PROCESSES various organisations who facilitate authorisations and settlements.

− THE PAYMENT SERVICE PROVIDER’S ACQUIRING BANK the PSP’s bank, where the payment is temporarily held before being sent to the merchant’s bank.

− THE MERCHANT’S ACQUIRING BANK the merchant’s bank, where the transaction is ultimately settled after payment is completed.

Part 2 of this will come up in my next blog post. I hope that this guide has helped you better understand how online card payments work in Nigeria.

If you have any further questions, please don’t hesitate to email me at tegasienterprises@gmail.com