Many people across the globe use credit cards. Recent statistics showed that about 77% of Europeans use credit cards to make payments.
One of the main benefits of this payment method is its seed. However, a series of procedures happen behind the scenes, enabling the credit cardholder to make their payment and the merchant to receive their payment.
Below is a comprehensive guide on credit card processing and how it works.
What Is Credit Card Processing?
Credit card processing is the behind-the-scenes set of procedures that must take place for an individual to make a payment with a credit card successfully. Typically, there are several parties involved in these credit card processing procedures.
The first party is the credit cardholder. This is the owner of the credit card who initiates the entire process by making a payment with the card. Then there’s the merchant/seller who accepts the credit card as a payment method.
Normally, merchants who allow their buyers to pay using credit cards have POS machines that they can swipe their cards to make their payments. If it’s an online seller, the buyer can enter their credit card information in the designated section to make the payment.
The third party is the credit card issuer or the issuing bank. As the name suggests, this is the bank that issues individuals with credit cards. An issuing bank approves credit card transactions forwarded by the acquiring bank.
The next one is the acquiring bank that automatically sends the transaction to the issuing bank via a credit card network—another entity involved in the credit card processor, also known as the payment processor.
Credit Card processors act as intermediaries between acquiring banks, credit card networks, and issuing banks. Once the merchant collects the buyer’s credit card information, they send it to the payment processor, who forwards it to the credit card network. Usually, credit card processors have to abide by the Payment Card Industry Data Security Standards (PCI DSS) set credit card networks.
The last party involved in credit card processing is the credit card network. Many people often confuse this with credit card processors. Well, a credit card network is the brand of an individual’s card. It could be MasterCard, or Visa, to name a few.
A credit card network oversees transactions between the acquiring and issuing banks. It sets guidelines that guide all the involved parties throughout the process.
How Does Credit Card Processing Work?
Credit card processing typically takes place in two phases; authorization and settlement Phases.
This payment processing phase involves authorization on whether the transaction made by the credit card is legit and if the credit card holder has enough credit to make the payment. Here’s a breakdown of how the entire process.
Step one: If a particular credit cardholder is buying goods or services from a physical store, they will swipe or insert their card on the seller’s POS machine. If it’s an online store, the cardholder will key in their credit card details on the designated payment page.
Step two: The merchant’s POS machine automatically sends the buyer’s credit card transaction details to the payment processor. With online sellers, a payment gateway is used to encrypt the buyer’s credit card information and run a fraudulent check before sending the transaction to the payment processor.
Step three: The seller’s preferred credit card processor forwards the transaction to the acquiring bank.
Step four: The acquiring bank sends the transaction information to the credit network, which forwards it to the issuing bank.
Step five: Once the issuing bank receives the transaction details, it checks the credit cardholder’s information, such as the Card Verification Value(CVV) code and credit card number, to ensure it’s legit. It also verifies if the credit card holder has sufficient credit to make the payment.
Step six: After conducting the necessary verifications, the issuing bank either approves or denies the transaction and sends the response back to the credit card network, which forwards it to the acquiring bank, which sends it to the payment processor, who forwards it to the merchant.
This payment processing phase involves transferring the money from the issuing bank to the acquiring bank. Here’s a step-by-step procedure of how it happens.
Step one: The seller sends the authorized transaction to their preferred credit card processor.
Step two: The payment processor then forwards the approved transaction to the acquiring bank, which sends it to the credit card network.
Step three: The credit card network then sends the authorized transaction to the issuing bank, which transfers the money (minus the interchange charges) to the acquiring bank. Once the seller’s bank receives the funds, it transfers them to their account.
While it isn’t mandatory for credit cardholders to know about all these credit card processing procedures, it is best to have an idea of what happens when one makes a transaction. This may help them understand what to do if anything goes wrong.
On the other hand, merchants need to understand each of the payment processing procedures. By doing so, they can make a more informed decision on which credit card processor is ideal for them.
Moreover, since there are charges that the seller has to pay during these processes, they will know how to strategically increase the prices of their goods and services to recover those costs.