Home Business Credit Card Processing 101 – How It Works

Credit Card Processing 101 – How It Works

by Lee Mark

If facts and figures are swimming around in your head, and sales literature is cluttering your email Inbox, take a moment to reframe the situation. Outline the pros and cons of each choice of credit card processing solution on paper today!

Credit cards enable you to receive payments. You must then choose a credit card processing company. Processing payments with credit card companies is an essential business decision that goes well beyond its core function. Even if you aren’t an expert, knowing how credit card processing works will make you a more informed consumer.

To understand how the payment process works, here are a few insights to help you:

Characteristics of Credit and Debit Card Transactions

  • Cardholders obtain credit or debit cards from issuing banks, then use the cards to purchase goods and services.
  • Businesses that accept card payments for goods or services are known as merchants.
  • Establishing and maintaining merchant accounts is the responsibility of a merchant bank. The merchant banks enable the merchants to accept bank deposits from credit and debit cards.
  • Companies that process credit and debit card transactions are payment processors. Payment processors provide a link between merchants, merchant banks, card networks, and other entities involved in card payments.
  • Banks, credit unions and other financial institutions are issuing banks that issue debit and credit cards to cardholders through card associations.

There are three distinct processes involved in credit card processing:

  1. Authorization
  • In exchange for goods or services, the cardholder presents their card (or another secure method) to a merchant. Alternatively, a payment request can originate from a credit card terminal, point of sale system, eCommerce website gateway, or a mobile or in-app payment receipt.
  • A merchant requests authorization for payment from their payment processor.
  • Upon receiving a transaction from the payment processor, the card association forwards the transaction to the bank issuing the card.
  • Authorization requests are made to the issuing bank, which includes parameters such as CVV, AVS validation, and expiration date.
  • An issuer approves or declines a transaction. Transactions may be declined due to insufficient funds or available credit if the cardholder’s account is closed or expired if a payment is past due, or for other reasons.
  • After the approval (or denial) status is received from the issuing bank, it is sent on to the card association, merchant bank, and eventually to the merchant.
  1. Settlement & Funding
  • Payment processors receive batches of authorized transactions from merchants.
  • In their network, payment processors communicate the debit amounts received with issuing banks by the card associations.
  • The issuing bank charges the cardholder’s account for the transaction amount.
  • Following the transaction, the issuing bank transfers the funds minus interchange fees to the merchant bank.
  • Deposits are made by the merchant bank into the merchant account.

To Conclude

Authorization is a matter of seconds. Settlement and funding that used to take days are now almost always handled overnight, enabling you to receive your funds much faster. Adopting the right credit card processing solution will inevitably give your business the best chance for growth.

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