How Credit Card Processing Works
With the increase in use of those plastic cards, overshadowing their paper bills and coins counterpart, it only makes sense to know how credit card processing works. Credit cards have been a quintessential part of doing business and yet, there are still traditional brick-and-mortar businesses that have not adapted this widespread practice. With just a swipe of a card, one can magically make a purchase of virtually almost anything available for sale. All that is needed is a simple coordination between secured and high-speed computer networks.
Every customer needs to know exactly how credit card processing works so they will not be left in the dark on how each sales transaction is recorded. Understanding how credit card processing works also help any business entrepreneur who want to setup a credit card payment system to accept payments for goods and services, specially if one will be doing business online. On the customer’s end, the credit card process stops when one had signed the transaction receipt. But for a merchant, the process had just started when the customer walks out the door or finishes placing an order online. There are extra steps that business owners need to take for their money to be deposited in their merchant’s bank account.
How Credit Card Processing Works: Learning the Lingo
Cardholder – the user or the owner of the credit card used to buy goods or services, in real-time or online
Merchant – the business ( retail, phone, or online ) that accepts credit card payments in exchange of their goods or services
Acquirer – the financial institution that offers credit card processing services to the merchant
Card Association – a network that acts as a gateway between the acquirer and the issuer for authorization and funding of transactions. Examples are Visa, Mastercard, American Express, Maestro, Discover, JCB, and many more.
Issuer – the financial institution that issued a credit card to the cardholder
How Credit Card Processing Works: The Interchange Process
When a merchant or a business has already applied for a merchant account, credit card payments can be accepted and here are the four steps in how credit card payment is processed:
1. Authorization
When the cardholder pays for a product or service ( by swiping the card, entering credit card info on an SSL secured website, or giving credit card info on the phone ), the merchant submits the transaction to the acquirer for authorization. The transaction is verified with the issuer instantly, where the card number and transaction amount are checked for validity. The credit card will be waiting for an “Authorization Request” from the issuing bank’s network. Then, the sales transaction will be authorized.
2. Batching
When the sales transaction is authorized, this data is stored in a batch. This will be sent later by the merchant to the acquirer to receive the payment for the sales ( which normally happens at the end of the business day ).
3. Clearing and Settlement
The transactions will be sent then by the acquirer through the card association, where the issuer will be debited for the payment and the acquirer will be credited. In this case, the issuer pays the acquirer for the sales transactions. Authorization in this stage only takes a few seconds.
4. Funding
When the acquirer receives the payment, the merchant will also receive theirs. The merchant shall
receive an amount equals to the sale transaction amount, less the discount rate or the fee the merchant needs to pay for the services of the acquirer in processing the sales transaction.
This entire system, from authorization to receiving funds, normally takes three business days. However, there are financial institutions like Bank of America which offers a faster way of receiving funds the next day. If there is an incident of a chargeback due to error in sales transaction or cardholder disputes, the issuer will return the transaction to the acquirer, which then will be forwarded to the merchant. The merchant, then, may accept or dispute the chargeback. Overall, how credit card processing works may be complex for those who are starting to use this convenient system in their business, but it can truly be an efficient way of collecting payment without the fuss. Credit is Business!
RESOURCES:
Bank of America. “ Card Processing Basics: How Card Processing Works. “ 2009.
http://www.bankofamerica.com/small_business/merchant_card_processing/index.cfm?template=card_processing_basics
AllBusiness.com. “ The Nuts and Bolts of Credit Card Processing. “ 1999 – 2009.
http://www.allbusiness.com/sales/internet-e-commerce-credit-card-authorization/898-1.html
Process USA. “ How Credit Card Processing Works. “ 2009.
http://www.processusa.com/how-processing-works.html
Goldbaum, Drew. “ How Credit Card Processing Works. “ EvanCarmichael.com.
http://www.evancarmichael.com/Retail/3788/How-Credit-Card-Processing-Works.html
Wells Fargo. “ How It Works: Payment Processing from A to Z. “ 1999 – 2009.
https://www.wellsfargo.com/biz/merchant/how/
