Credit Card Processing 101

Credit Card Processing

Processing credit and debit card payments is crucial to maintaining adequate sales in any industry. In a world where everything is done electronically, cash is becoming a rarity for many consumers and by providing another option to pay, merchants are automatically guaranteeing themselves a drastic increase in sales potential.

While a credit card transaction seems simple enough and takes mere seconds to complete in most cases, it’s actually an intricate process that entails several steps. The article that follows provides step by step details on exactly how the process works, giving merchants the knowledge they need to confidently accept credit cards from their customers and maintain their processing account in good standing.

How to Accept and Process Credit Card Payments

There are six basic steps involved in processing credit card payments, and while merchants are generally only responsible for a small portion of this process, it’s important to understand how to accept credit card payments and how they are processed from start to finish.

1. The customer swipes or taps their debit or credit card as payment for goods or services, hands their card to the merchant or enters their credit card information online.
2. The merchant accepts the payment in person or online and processes the information attached to the credit card using a payment portal.
3. The payment portal, which is hosted by the merchant’s credit card processor, collects the information attached to the customer’s credit card and sends the information to the card network.
4. The card network, which is the type of credit card used (ie. Visa, Mastercard or American Express), receives payment details from the payment processor and pass that information to the customer’s issuing bank, which is the bank that assigned the card to the customer (ie. Bank of America, Capital One, etc.).
5. Once the issuing bank receives details of the payment, it analyzes the customer’s accounts and verifies if they have the funds necessary to complete the transaction. In most cases, the bank will also run the payment through a series of fraud check. Once the issuing bank determines this necessary information, it sends a return message through the card network and payment processor to the merchant either approving or declining the transaction. In some cases, the bank may ask the merchant to hold the customer’s card and call for authorization – this may be due to suspected fraud or abnormal activity.
6. Once the merchant has received the bank’s decision, which is generally less than 30 seconds later, the merchant can complete the transaction.

The Transfer of Funds

While the steps to obtaining credit card approvals sound arduous, the fact is that the process is actually quick. In most cases, the entire transaction is completed in mere seconds. However, the process of transferring funds from the customer’s issuing bank to the merchant’s bank account can take days, even weeks, to complete.

Customers typically see a charge on their credit card instantly, but it’s important to note that this isn’t an actual charge, but a pre-authorization/hold that’s been placed on the card to determine whether or not the funds are available. Once approval has been obtained and the transaction has been completed by the merchant, the process of transferring funds begins. This process follows a similar path, starting at the customer’s issuing bank and ending with the merchant. Depending on the credit card network and the merchant’s payment processor, this transfer may take anywhere from several days up to several weeks.

Who’s Involved in the Process?

As mentioned earlier, there are several parties involved in processing credit card transactions. The primary functions, though, are carried out by four entities: the merchant’s bank, the credit card processor, the card network and the issuing bank.

Merchant Bank

The merchant bank, which is also sometimes referred to as the acquiring bank, is the bank that hosts the merchant’s primary business bank account. In some cases, merchants also work with their bank to process payments but for those who are in need of high risk credit card processing, a third party payment processor that specializes in working with high risk merchants and industries needs to be involved.

When it comes to credit card processing, the merchant bank’s main role is to deposit the proceeds of a transaction into the merchant’s bank account once the sale, or the transfer of funds, is completed.

Credit Card Processor

Credit card processors exist to facilitate communications between the merchant bank, credit card network and issuing bank. The processor typically provides the merchant with a secure network and equipment that can be used to process sales transactions. They’re responsible for obtaining payment details and the customer’s credit card information and distributing it to the appropriate parties to obtain approval. They’re also required to ensure that all transactions adhere to the rules and regulations of the Payment Card Industry Security Standards Council.

Credit card processors usually keep a percentage of each transaction in exchange for the service that they provide or charge a fixed monthly rate. In some cases, high-risk merchants are subject to higher transaction fees or large deposits to protect their accounts.

Card Network

Card networks, sometimes referred to as card associations, are the companies that host credit cards such as Visa, Mastercard and American Express. Networks work with issuing banks to supply credit cards to consumers and act as a middle-man between issuing banks and merchant banks. Interchange fees, also known as credit card processing fees, are charged by card networks for the services they provide and are passed onto issuing banks, who generally pass them onto cardholders in the form of annual fees.

Issuing Bank

Issuing banks, also known as the consumer’s bank, is the bank that has provided the customer with a credit card. This bank works with major credit card providers such as Visa and Mastercard to extend credit to consumers. In the process of completing credit card transactions, the issuing bank has one of the most important roles. It determines whether or not a customer has adequate funds to complete a transaction and upon approval, is responsible for initiating the transfer of funds to the merchant’s bank.