On the surface, a credit card transaction process just appears simple: A customer swipes their credit card, and before they can even recognize it, the transaction has been completed. Behind each swipe, however, is an incredibly more complicated process than what actually meets the eye. The truth is that the mere action of sliding the card and signing the receipt is just the initial and final stages of this complicated procedure. And this entire process – though it takes place in only a few seconds – involves different steps and several role players who work behind the scenes.
While familiarizing with the credit card payment process might not seem useful to the average customers, it offers some valuable insight into the inner working of all modern commerce systems as well as the final price we pay at the end of the transaction. More so, knowledge of the entire credit card transaction process is crucial for most small business owners since the payment processing only represents one of the most considerable costs that merchants have to confront.
How the Credit Card Payment Processing System Works
When it comes to credit card payment processing, what mainly matters is whether or not a customer is able to use their card. Since it is not the merchant’s responsibility to explain to their customer why their card was declined, this information is not relayed to you. Here is how the credit card payment processing system works.
The first and most crucial stage of the credit card payment processing is authorization. It is essential to understand this step because, without it, a customer’s card will not be accepted. Authorization is merely the process of confirming whether the credit card is loaded with sufficient credit, enough to buy goods and services from any point-of-sale. While the entire authorization process typically takes only a few seconds, here are the steps the authorization follows:
I. The customer presents their credit card at a point-of-sale machine to make a purchase. This could happen in person, over the phone or the customer can enter their information into an e-commerce site.
II. The information is then transmitted to a processing system. For example, in a card-present scenario, you will swipe your card and enter the dollar amount, then this information is relayed to the processing system.
III. This information is then forwarded to a card payment brand like MasterCard or Visa.
IV. After that, the payment brand then sends this request to your card issuer, which is usually the bank that issued you with the card.
V. The issuer can then approve or decline this transaction, and the response is relayed back to your payment brand.
VI. The payment brand then transmits this response to a payment system, often one that you chose.
VII. This response is then forwarded either through a point-of-sale gadget, verbally over the phone or through an e-commerce website so that you can complete the transaction.
VIII. The card will then either be approved, and you will get an authorization number for the same. An approval means that the dollar amount that you specified shall be deducted from the cardholder’s available credit limit for the case of future settlement.
Major Parties to Credit Card Transactions
Prior to understanding the credit card payment process, it is important to familiarize with the major parties involved in credit card transactions. In most cases, the major players involved in the authorization and settlement of the transaction are the cardholder, the merchant or business, the acquiring bank (merchant’s bank), issuing bank (cardholder’s bank), as well as the card associations (MasterCard and Visa).
Cardholder: If you already own a debit or credit card, you’re probably familiar with the role of any cardholder. But for purposes of being thorough, a cardholder is the individual who obtains the bankcard (either credit or debit) from any card issuing bank. The cardholders then present the card to merchants as payments for services or goods.
Merchant: Technically speaking, a merchant is referred to as any business that is engaged in the sale of services or goods. However, only the merchants who accept bankcards as a method of payment are pertinent to this explanation. With that in mind, the merchant is any business which maintains a merchant account that makes it possible for them to accept debit or credit cards as payment from their customers (cardholders) for all the goods and services provided.
Merchant’s Bank (Acquiring Bank): The acquiring bank or merchant’s bank is usually a registered member of the card association (MasterCard and Visa). The acquiring bank is mostly referred to as the merchant bank because they typically contract with the merchants to create and maintain accounts known as merchant accounts which allow any business to accept credit card payments. Acquiring banks often provide the merchants with software and equipment to accept credit cards as well as handle customer service and other vital aspects that are involved in card acceptance. The merchant’s bank also deposits funds from all credit card sales into the merchant’s account.
Interestingly enough, a majority of merchants fail to recognize their acquiring banks as the sole providers of their merchant accounts. In most cases, the acquiring banks frequently enlist the assistance of third-party member service providers and independent sales organizations to conduct and monitor the daily activities of their merchant accounts.
The Cardholder Bank or Issuing Bank: The issuing bank is responsible for issuing credit cards to the consumers and is always a member of the card associations. The issuing banks usually pay the acquiring banks for the purchases made by their cardholders. It is, therefore, the responsibility of the cardholder to repay his issuing bank under the terms of the credit card agreement.
Card Associations: MasterCard and Visa are neither banks nor do they issue merchant accounts or credit cards. Instead, card associations act as the custodian and clearing houses for their respective card brands. They also serve as governing bodies for a community of financial institutions. The primary responsibility of card associations is to oversee all the members of their associations, including qualification guidelines and interchange fees, maintain and improve their card network as well as act as an arbiter between acquiring and issuing banks.
Credit Card Payment Process
Credit card transactions are customarily processed through different platforms, including wireless terminals, mobile devices, phones, e-commerce stores, and brick-and-mortar stores. The whole process from when you swipe your card through the card reader until when the receipt is produced only lasts less than three seconds. Here is a breakdown of the credit card payment process.
The authorization process serves the purpose of confirming that the buyer has more than sufficient funds on hand, or just enough breathing room before getting to their credit limit, to complete a transaction. This minimizes the risk of a merchant giving goods that the buyer is not in a position to pay for. The authorization process unfolds as follows:
• The customer provides the card information to the merchant, whether by dipping in person, swiping, or giving digits online or through the phone.
• The payment processing terminal then electronically relays the card number, the transaction amount, and the merchant ID number to an acquirer.
• This information is then routed to the customer’s issuing bank, and this serves as a request to authorize a transaction for a particular amount.
• The issuing bank then checks to see whether the customer has sufficient credit or funds. It also reviews for any red flags that could indicate a fraudulent transaction.
• If sufficient credit or funds are available and the transaction is not deemed fraudulent, the issuer will then send an authorization code via the network to the acquirer who authorizes this transaction and notifies the merchant.
• The merchant then hands over the requested service or product to the customer.
Authorization serves merely to confirm that the customer has sufficient credit or funds to buy the requested service or product.
Once the authorization is complete, and the merchant gives the requested services or goods, the customer has no role to play in the remaining process. However, the transaction is just far from finished. Batching is the next step of the credit card payment process.
• After a complete day of operations, a merchant electronically stores all payment information for every transaction authorized. Every day’s set of transactions is referred to as a batch.
• At the close of business, the merchant will send the set of transactions to an acquirer who then temporarily holds the batch in a secure, electronic system.
Once an acquirer has received all the merchant’s batch, the clearing process not begins. For all intermediaries, this is mainly fun since it is when they finally receive their payment.
• An acquirer sends the batch to the card association or network.
• Card association or network requests payment for the transaction from the issuer.
• The issuer then deductions a small transaction fee from the whole amount.
• The issuer then routes the net amount via the card network and to the acquirer.
This is the final step in the credit card payment process. In this stage, the merchant receives funding for a particular transaction and in most cases for all the transactions present in a batch. Although the usual electronic card transaction authorized and the customer out of the whole picture in only a matter of seconds, the whole four-step process could take a few business days to complete.
Leading Credit Card Processing Companies
Credit card processing companies are mainly tasked with the transmission and the security of all data relayed when a card is used online or at a store to make a purchase. In the payment-card system, there are two types of processors; the front-end processors and back-end processors. The former routes transactions from the merchants to the cardholder’s bank to acquire authorization. They ensure the customer has sufficient funds or credit to make a purchase. A back-end processor is responsible for the settlement of funds, which ends up with merchants receiving deposits for all their transactions.
Here are some of the big guns in credit card processing.
Bank of America: The merchant services offered by the Bank of America have the advantage of functioning in the second-largest bank in the U.S.A. This service promises the acceptance of all forms of payment, from gift cards to electronic checks, and from debit cards to credit cards. Moreover, you are guaranteed to access your funds on the next business day.
Citibank: Citibank group usually processes transactions in over 100 currencies. It also provides end-to-end processing services, from transactions to pricing, customer service, billing, and reporting.
Wells Fargo: Ranked among the top four banks in the United States, Wells Fargo provides next-business-day funding, tokenization and encryption technology and the support for both signature and PIN transactions.
Chase Paymentech: The payment processing section of Chase, which is the largest bank in the U.S authorizes and processes payments in over 130 currencies. And just like fellow credit card processing companies, it offers fraud detection, security solutions, and analytics.
Global Payments: This is a credit card processing company that focuses on making sure that businesses accept all the major forms of payment. With that respect, its services include electronic check conversion, credit card purchases, money transfer, recovery services, check guarantee, verification, and point-of-sale equipment.
Worldpay: This UK-based company is arguably one of the longest-tenured online payment processing platforms. This company provides various payment services for both in-store and online channels. In the year 2015, this company processed a staggering 13 billion transactions that were valued at more than $526 billion. This company also provides a plethora of services across different channels, which has gone a long way in diversifying its revenue streams.
It is incredibly unusual how much takes place after you punch, tap, dip, or swipe in your credit card. The overly behind-the-scenes processes described in this piece occur millions of times in a day, in each corner of the globe. The complexity of most electronic payment systems is what tends to underscore their fragility. Small-scale crises like data breaches and fraudulent transactions by hackers occur continuously and it is up to financial institutions and credit card networks to reduce the frequency with which such incidences occur.