How Does Credit Card Processing Work?

How Does Credit Card Processing Work?

Swipe, dip, or tap. A credit card transaction may seem straightforward and uncomplicated, but do you know what happens behind the scenes? Payment processing is how establishments and enterprises complete debit card and credit card transactions.

The processing covers several parties: the card network, the issuing bank, the acquiring bank, the merchant, and the cardholder. Payment processing services fast-track transactions and payment gateways safely send data so money from the customer’s issuing bank can be delivered to a merchant’s account.

Note that the payment processing happens very quickly, in a matter of a few seconds. In the end, the business completes a sale, and the customer successfully makes a purchase.

How It Works

A series of automated steps happen when you use a credit card to make a purchase. On the surface, all the customers need to do is swipe their card, then they are done. However, there is more to it. Payment is processed, checked out, declined, or accepted, and money is transmitted.

And all of these occur during a single card transaction and take several seconds to complete the transaction. Here are the steps involved:

  • Point of Purchase. It occurs when a consumer makes a purchase and provides a payment method, such as using a check, cash, credit card, or debit card.
  • Payment Gateway. The payment gateway refers to a tool that safely connects information that’s sent via the debit and credit card processor from a consumer’s bank to the merchant’s account. It also communicates a payment acceptance or decline.
  • Payment Processor. It delivers information or data from the customer’s issuing bank to the merchant’s account. The payment processor gathers card information, verifies card security, and is responsible for the payment transfer.
  • Issuing Bank. The issuing bank receives the card details and verifies them to ensure the transaction isn’t fraudulent. Also, the bank makes sure the cardholder has sufficient credit to cover the purchase and is in good standing. Then, the issuing bank sends a response through the card network to the merchant’s bank.
  • Merchant Account. The response is accepted at the seller’s terminal or credit card machine. If all the details check out, the card transaction will be approved. If not, the machine will show a declined or denied message.

Once the cardholder sees this information, the transaction is finished, and the response code will be saved on the merchant’s credit card machine for the settlement, which involves money sent back and forth from party to party.

Who Is Involved In The Process?

Generally, there are a few parties included in the credit card processing:

  • Merchant. It refers to any seller or store that provides services and goods. Merchants often provide a credit card or debit card machine for the consumer to use to swipe their card and pay off fees to the card company or bank.
  • Cardholder. The cardholder is the one who enters a card number into an online portal, swipes the card, or inserts a chip card.
  • Card Network. The card network sends data back and forth and sets guidelines or fees among the merchant, issuing bank, and the acquiring bank.
  • Acquiring Bank. Also known as the merchant bank, it sends the card information and transactions to the card network. It might provide the seller with the equipment to handle debit card or credit card payments.
  • Issuing Bank. It authorizes card information, charges the cardholder for each transaction via a monthly statement, and pays the acquiring bank.

Why It’s Important To Learn About Credit Card Processing?

Although it is unnecessary or not vitally important for cardholders to know everything about credit card processing, it may help you understand and learn what could go wrong. Card networks and acquiring banks charge merchants a small fee for each card transaction.

For this reason, merchants might charge customers a minimum fee when using a credit card or debit card to make a purchase. What’s more, they could raise the cost of services or goods to compensate for the credit card process fees.

In some countries, laws forbid merchants from passing these fees to the consumers, and for many vendors, it does not make sense to add hefty charges for using a debit or credit card. Moreover, if you see a “cash only” signage, it is an indication that the merchant might be keeping prices lower and avoiding credit card processing fees.

Final Thoughts

Credit cards offer comfort and practicality to cardholders. However, what’s impressive is the back-end communications among the parties involved in credit card processing. With a swipe, a stash of information is sent between the issuing bank, card network, acquiring bank, and the merchant to securely validate card details and complete transactions.

Cardholders don’t usually need to know how card processing works, but it is helpful to know why sellers set guidelines and fees for customers.

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