How do card payments work, and what does it take to enable everyday purchases with crypto? 

A short guide to using existing financial infrastructure to make crypto debit cards a reality

“Wallets, stablecoins, gas, security keys… Crypto is just too complicated for everyday payments.”

As we’ve developed our crypto debit cards at Kulipa, we’ve heard that a lot – even from close friends and crypto natives. But here’s the thing: it’s not true. Or at least, it’s not any more true for crypto than it is for fiat. After all, those same friends aren’t going around saying:

“Issuer processors, interchange fees, fraud alerts… Fiat is just too complicated for everyday payments.”

Why? Because traditional banking has (largely) taken all of those complications away from the end user, at least as far as everyday payments are concerned. Today’s consumer is happy with how payment transactions work because they have zero idea of what’s happening in the background. For them, it’s simply “Pick what I want, put my card up to the machine, and go about my day.”

Kulipa is bringing that same ease of use to crypto payments, all the way down to having a debit card that you can use wherever Mastercard and Visa are accepted and that – most importantly – works the exact same way from a user’s standpoint.

But to do that, we’ve had to take all of the complications that exist for crypto (and fiat!) and make them disappear for the end user. Specifically, the complications exist in two flows: the payment authorization flow and the clearing and settlement flow. 

Below, we’ll walk you through how we’ve done it, giving wallets the power to issue their own branded cards to all of their users.

The payment authorization flow in a nutshell

When we go into a shop and pay for groceries, or enter our card information to buy some new clothes online, we’re all used to the slight lag between the moment when the card is scanned and when the transaction is approved.

That lag is covering up a lot of steps – steps that the end user is never aware of, and quite simply doesn’t need to be aware of. Importantly, adapting these steps in order to use crypto in everyday payments doesn’t require a completely new flow, but only changing one particular aspect of it! But we’ll get back to that later.

Here’s a general schema of the payment authorization flow:

Let’s break it down: What happens when a consumer says “Yes, I want a coffee”? 

(Hold tight, jargon incoming.) 

The consumer provides their card information to the merchant, through a physical point of sale (POS) like Ingenico (for a coffee at Starbucks).

Now, one might think that the PSP or POS goes directly to the consumer’s bank to ask if the customer has enough money. But they don’t – at least not directly. Instead, they need to talk to the card network, which for the large portion of transactions means the household names of Mastercard or Visa. These card networks are actually just a hub that processes all authorization requests. 

And because getting connected to these card networks is very complicated, long and expensive, there’s another intermediary that exists: payment processors, who take on the grueling task of connecting individual banks to card networks. 

Before diving deeper on payment processors, a word about banks. In the world of payments, the customer’s bank is referred to as the issuing bank – because they’re the ones issuing the card that’s used for the payment; the merchant’s bank is referred to as the acquiring bank, because they’re the ones acquiring the money from the transaction.

Now, back to payment processors. None of them are household names, such as Episode6 on the issuing side or Lyra on the acquiring side, because their logos aren’t riding around in your back pocket all day. They’re still critical within the flow, though, because they’re the ones communicating with the banks. 

Payments processors come in two flavors: the issuer processor, connecting the issuing bank to the card network, and the acquirer processor, connecting the acquiring bank. 

So in sum, the POS/ PSP sends the authorization request to its acquirer processor, who forwards it to the card network, who forwards it to the issuer processor, who finally asks the issuing bank: “Does your customer have enough money in the bank?” 

If yes, the answer goes through the same path back to the POS/ PSP terminal, where the consumer and merchant can see “Payment accepted”. At the same time, a message is sent by the acquirer processor to the acquiring bank to say that the merchant’s account can expect a payment. 

Eventually.

Because even though the payment authorization flow only takes a few seconds, there is that second flow mentioned earlier that now comes into play: the clearing and settlement flow.

The clearing and settlement flow in a different nutshell

Even though the consumer and the merchant both feel the transaction has been completed, in reality the actual fund transfer won’t happen for another 24-72 hours (depending on when the transaction takes place, for example during the weekend, right before a holiday, etc.). 

Completing the fund transfer first requires the payment to be cleared: at the end of the day, the merchant shares a clearing file to the acquirer, via its acquirer processor. The clearing file is used by the banks to reconcile which payments have been made throughout the day by their customers, and towards which banks. The acquirer then sends the file to the card network who forwards it to the issuing bank.

Upon receiving it, the issuing banks will send the money from the consumers' accounts to the card network, specifically to a settlement account. Once there, the money will be sent back out from the settlement account to the merchant’s bank, and the transaction is complete.

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Kulipa: Your new card issuer

That’s almost 600 words to describe what, to the consumer and the merchant, takes a few seconds on one little machine. And that’s what we mean when we say that fiat payments aren’t simple – they just feel simple!

That’s also why we create frictionless crypto debit cards: not because they’re simple, but because we already know how to adjust the existing system to accept crypto.

Let’s go back to our graphics, now showing how Kulipa can become a part of them in order to issue crypto debit cards that work in the same simple-for-the-end-user way that traditional payment cards do.

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Kulipa stands in the same place as the traditional issuing bank, as we are the ones issuing the debit cards.

At the same time, we do add in another step – completely unseen to the consumer and the merchant! – that connects us to the wallet where the consumer has their crypto holdings. With that verification, we are able to use the rest of the transaction rails that support frictionless everyday payments.

At the risk of becoming repetitive, the point isn’t that all of this is simple: it isn’t! And the payment industry is big business because of it. To compensate for that complexity, every transaction in the EU includes a 0.2% fee paid by merchants that is shared out among all of the parties involved (and that fee is roughly 1.5% in the rest of the world). This is called the interchange fee, and we share it with wallets. Those fees are there to ensure that the transaction process looks simple, and they can work for both fiat and crypto.

At least, they can now that Kulipa is here 🙂

Want to find out more? Head over to our homepage. 

Want to create your wallet’s branded cards to give your users the power of crypto in their pocket? Set up a call with us here. 

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