How To

How Credit Card Payment Processing Works?

credit card processing

Running a successful online business requires you to process credit card payments. If you’re new to payment gateways, this blog provides you basic understanding of how credit cards work. It’s good to know how credit card transactions work as the fees are incurred at various systems and knowing the working system helps you save money.

Let’s have a look at the credit card payment processing:

Key Players
So, the key players involved in authorization and settlement of transactions are:

  • Cardholder
  • Merchant
  • Merchant Bank (Acquiring Bank)
  • Issuing Bank (Cardholder Bank)
  • Card Associations like Visa, MasterCard etc.

credit card processing

Cardholder

A cardholder is the person who obtains credit or debit card from issuing bank. The customer is the cardholder and presents that card to merchants for payment of goods or services.

Merchant

He is the provider of goods or services. A merchant needs to maintain a merchant account to enable accepting credit or debit cards as payment method from customers. Merchant can be engaged in any type of business.

Merchant Bank

Merchant bank contracts with merchants to maintain their account. This bank is a registered member of card associations and provides merchants with software to accept cards. They also deposit funds from sales to merchant’s account.

Cardholder Bank

This is cardholder’s bank which issues credit cards to the customers. The issuing bank is also a member of card associations. It pays acquiring bank for the amount of purchases made by the client.

Card Associations

Card Associations support credit card payment processing and don’t issue credit cards. They act as an arbiter between issuing and acquiring banks and govern interchange fees and qualification guidelines. Some of the examples of card associations are Visa and MasterCard.

Credit Card Payment Processing:

Stage 1:

Authorization
1) The customer requests a purchase from the merchant.
2) The merchant submits request to acquiring bank.
3) The acquiring bank routes the information through appropriate card network to issuing bank.
4) Transaction information is routed between issuing and acquiring banks.
5) Credit card issuer receives information from acquiring bank and responds by accepting or declining the transaction.
6) Now, the card issuer sends a response code to the acquiring bank.
7) Merchant receives the response code and is stored in a batch file.

credit card processing

Stage 2:

Clearing and Settlement
1) The merchant sends their batch of authorizations to the acquiring bank.
2) The acquiring bank transmits the authorizations through interchange.
3) Card association debits the issuing bank’s account and credits the acquiring bank’s account for the net amount i.e. gross receipts less interchange and network fees.
4) Issuing bank pays for purchases to the acquiring bank.
5) Cardholder repays his issuing bank for the purchase.

So, this is how credit card processing works and makes it easy for you to make online purchases convenient and secure. Have something to add to this story? Share your views in the comments section below.

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