How Credit Card Processing Works

Important Information About Credit Card Processing for Business Owners

Although the entire transaction only takes seconds to complete, the credit card processing system is a complex process that takes multiple parties and steps to complete. The bankcard networks handle billions of transactions between merchants, processors, and banks around the world. And these bankcard networks must be as secure as possible to prevent credit card fraud. Learn more about the parties needed in order for a transaction to be completed, as well as the steps of the credit card processing system.

Parties Involved in Credit Card Processing

To understand credit card processing, you first must understand the players involved. They include:

Cardholder

These are your customers. Cardholders are people who obtain a credit or debit card from an issuing bank and use it as a payment method.

Merchant

Merchants are any businesses that sell goods or services. If you are a small business owner, you are the merchant. A merchant account is needed for your business to accept credit or debit cards from cardholders.

Card Associations

More commonly known as Visa and MasterCard, card associations are responsible for working with credit card processors to transfer data between the issuing bank and the merchant. They also are in charge of setting the interchange and assessment fees, although they do not collect all of them. For example, the interchange fees are passed onto the issuing bank.

Card associations, or networks, don’t actually issue credit cards or merchant accounts. They function as the governing body of a community of financial institutions, ISOs and MSPs that work together in association to support credit card processing and electronic payments.

Acquiring Bank

Think of the acquiring bank as the merchant’s bank, as they contract with merchants to create merchant accounts. An acquiring bank is a registered member of the card associations (for example: Visa and MasterCard). They are the ones who provide equipment and software to merchants so they are able to accept cards and other necessary aspects involved in card acceptance. The acquiring bank is also responsible for depositing funds from these sales into a merchant’s account.

Some merchants don’t see their acquiring bank as the primary provider of their merchant account. This is because acquiring banks play more of a hands-off role and enlist the help of third-party independent sales organizations (ISO) and membership service providers (MSP) to conduct and monitor the day-to-day activities of their merchant accounts.

Issuing Bank

An issuing bank is the consumer’s bank; they are responsible for issuing credit cards to consumers. Like an acquiring bank, an issuing bank is also a member of the card associations. An issuing bank pays the acquiring bank for any purchases the cardholders make. Cardholders are then responsible to repay the issuing bank under the terms of their agreement.

Credit Card Processing Steps

Now that you know who’s involved, it will be easier to understand how the process works. While you don’t necessarily need to understand the inner-workings of the bankcard system, knowing how it works can potentially help you save on credit card processing fees. The steps are as follows:

1. The Consumer Makes the Purchase

In order for the process to begin, a consumer must purchase a good or service from the merchant using a credit card. This can be done in person, online, by phone, or by mail.

2. The Transaction is Entered

The consumer will either swipe or enter their card or insert it into the payment processor. For online purchases, the consumer will manually enter their credit card information.

3. The Processor Collects Data

The payment processor collects the consumer’s credit card information, as it is responsible for routing that data across to other stages and facilitating communications between the parties. Their first role is to send the payment information to the card network.

4. The Card is Approved or Denied

After the data has been received, the credit card issuer will either approve or decline the transaction. Common reasons for cards to get declined are the card is no longer valid or the consumer does not have enough funds available. Additional security measures may be taken to verify whether the purchase is legitimate or not.

5. The Transaction is Completed

If the transaction is approved, the processor and merchant receive an authorization response. The merchant then goes ahead and completes the transaction. But just because the transaction is complete does not mean that the funds are released yet. This is a separate process that takes several days to complete, depending on the card networks involved.

6. The Merchant Submits a Batch Closure

In order for the merchant to receive the money, it must first complete a batch closure at the end of the day. This will close out all of the transactions that have been processed on that day. This allows the processor’s acquiring bank to collect the money from the credit card issuers.

7. The Funds are Deposited to the Merchant

Once the funds have been collected, the acquiring bank then deposits the money into the merchant’s bank account.

Now that you know how the process works, be sure to visit our blog to learn how to determine your credit card processing fees!