A Guide to Credit Card Processing

If you have ever used a credit card to conduct purchase transactions you will no doubt agree that the process is very efficient, fast and convenient. However, while transacting using a credit card seems rather easy at face value, the underlying process is actually quite complex and involves several steps to perform. So, in this post, we are going to demystify how credit card processing works and the various parties that are involved in this multi-institutional process. Read on to find out more.

How does Credit Card Processing Work?

Credit card processing is an operation that can be described in six main steps. Each of the steps involved in this process entails the transfer of a credit cardholder’s payment information and the authorization by one party to the next. The purpose of credit card processing is to determine whether a cardholder has sufficient funds in their account to complete a financial transaction.

The process usually begins when a consumer swipes their cards or hands over their card information to the merchant from whom they are purchasing a product or service. The merchant is then tasked to accept and collect the payment information. The merchant can accept the payment physically in card-present transactions if the purchase is being done at store-front or use an online gateway in case the customer is purchasing from an online store.

Once the merchant has accepted payment, the credit card processing company collects the payment information and routes it to a card network. The processor is also responsible for facilitating communication between the various parties involved in credit card transactions. Most credit cards typically operate one of the major credit card networks such as VISA or Mastercard. The credit card network’s primary task is to receive the payment information from the processing company and pass it to the customer’s bank.

When the bank receives the payment request of the credit card holder, it checks the funds available in the customer’s account to determine whether there are enough funds to complete the transaction. The bank is also responsible for running security checks to verify whether the purchase is legal and legitimate. After the bank has verified that the purchase is legitimate and the cardholder has enough funds, it sends back the information to the credit card processing company via the credit network and allows the transaction to continue. Conversely, if the bank determines that there are insufficient funds in the customer’s account or the purchase is fraudulent, it will deny the transaction from proceeding. The payment information is then sent back to the merchant with a confirmation message of ‘Approved’ or ‘Declined’ depending on whether the payment is successful or not.

It should be noted that at this stage, the funds are not yet released to the merchant’s account, which means that the transaction is yet to be finalized. The process of crediting the merchant’s account after payment has been made by a customer typically takes several days depending on the credit network that is used. In general, Visa and Mastercard tend to complete transactions much quicker compared to American Express.

Which Parties are Involved in Credit Card Processing?

The operations involved in credit card processing are usually performed through an interrelation of four key players, namely, the merchant (also known as the acquiring bank), the credit card processing company, the card network and the consumer bank( also referred to as the issuing bank). Here are the roles that each of these parties plays in the process:

  • The Merchant

This refers to the bank or financial institution with which a business holds its funds. The role of the merchant is to deposit funds in a business’ account once a payment has been successfully made via credit card by a customer.

  • Credit Card Processing Company

These institutions function as links or messengers between the merchant and the cardholder. They are responsible for securing payment and ensuring that all transactions adhere to the rules and regulations set by the Payment Card Industry Data Security Standard ( PCIDSS). These companies usually exact a fee from the merchant for offering this service.

  • Card Networks

These organizations usually work together with card processing companies to facilitate communication between merchants and the issuing banks. In addition to this, card networks are also tasked to set interchange fees for credit card transactions.

  • Issuing Bank

The issuing bank refers to the bank which a customer is registered with. The primary role of the issuing bank is to determine whether a customer has sufficient funds to complete a payment transaction and release customers’ funds to merchants in order to complete payment. 

Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.