How Credit Card Processing Works

The stages of credit and debit card payments processing explained

Business owners and managers tend to also be clever consumers. That is understandable since you routinely assess the many products and services needed to keep your business running efficiently.

Accepting credit cards allows you to be paid. That means you will need to choose a credit card processing company. Credit card processors are vital partners beyond the main service of processing payments, making it a serious business decision. You do not need to become an professional, but you will be a better purchaser if you know how credit card processing works.

To understand how payments processing works, we will look at the players and their parts.

Who are the players in a credit and debit card transactions?

• A cardholder acquires a credit or debit card from an issuing bank, uses the account to pay for goods or services.
• A merchant is any type of business that takes card payments in exchange for goods or services.
• A merchant bank creates and maintains merchant accounts. Merchant banks let merchants accept deposits from credit and debit card payments.
• Payment processors are businesses that process credit and debit card transactions. Payment processors join merchants, merchant banks, card networks and others to make card payments promising.
• Issuing banks are the banks, credit unions and other financial establishments that issue debit and credit cards to cardholders through the card associations.
• Card associations include Visa, Mastercard, Discover and American Express. The card associations set interchange rates and requirement guidelines, and act as the mediator between issuing banks and acquiring banks among other vigorous functions.

How does credit card processing look like in motion?

Credit card processing works in three distinct procedures:

1. Authorization
2. Settlement
3. Funding

First, let’s look at credit and debit card authorization procedure.

1. The cardholder offers their card (swipe, tap, insert or other secure method i.e. contactless or by entering number for online credit card payment) to a merchant in exchange for goods or services. The request might come from a credit card station or point of sale system in a brick-and-mortar store, an ecommerce website entry, through mobile or in-app payment acceptance.
2. The merchant conducts a request for payment authorization to their payment processor.
3. The payment processor submits transactions to the correct card association, ultimately reaching the issuing bank.
4. Authorization requests are made to the issuing bank, including parameters like CVV, AVS confirmation and expiration date.
5. The issuing bank approves or declines the transaction. Transactions can be declined for inadequate funds or existing credit, if the cardholder’s account has been closed or expired, if a payment is past due or other issues.
6. The issuing bank then sends the approval (or denial) status back along the line to the card association, merchant bank and finally to the merchant.

That is the credit card authorization process in short. The card authorization process takes only a little bit of time.

Now let’s look at the credit card settlement and funding method. This part is basically how the merchant receives payment from the credit cards they accept.

1. Merchants send sets of authorized transactions to their payment processor.
2. The payment processor passes transaction specifics to the card associations that connect the appropriate debits with the issuing banks in their system.
3. The issuing bank charges the cardholder’s account for the amount of the transactions.
4. The issuing bank then transfers proper funds for the transactions to the merchant bank, minus interchange fees.
5. The merchant bank deposits money into the merchant account.

The settlement and funding procedures that used to take days are now almost always handled overnight, helping merchants receive money rapidly.

That is the basic credit card payment method.

To learn more about the workings of credit card processing, connect with one of our payments specialists. We are happy to help and answer your questions by walking you through the easy process.