How do Credit Card Processors Work?

Almost every modern business accepts credit cards. Yet few business owners, operators, and managers truly understand the credit card transaction process from beginning to end. And who can blame them? Credit card processing is a somewhat complex process that happens largely behind the scenes. For business people who are worried about inventory, employees, customers, and every other thing under the sun, the details of credit card processing can feel unnecessary.

Yet understanding how your business receives money is always a plus. Today, we will be reviewing the credit card transactional process from beginning to end, how credit cards and debit cards are processed differently, and more.

Credit Card Processing 101: The Seven Steps of a Credit Card Transaction

Credit Card Processing 101: The Seven Steps of a Credit Card Transaction

There are seven (7) fundamental steps of any credit card transaction. Let’s start at the beginning.

1. Accepting a Credit Card Payment

Step one is essentially the customer giving their credit card to the merchant. Depending on whether the transaction is being processed in person with a POS System or mobile credit card device, or whether the transaction is happening online, this step can differ slightly.

Most POS or mobile devices will require a chip insert or a swipe. This may be followed by a signature or additional requests for information. Online purchases generally require the customer to input his or her billing and mailing information. In all cases, the customer will then review their order/information and submit the initial payment.

2. Merchant Sends Authorization Request to the Payment Processor

A third party payment processor is an independent organization with an agreement with your merchant services provider. The credit card payment is sent through this organization for authorization, but the process does not stop here. Instead, think of the payment processor as the party responsible for passing along this information securely to the necessary banks and financial institutions.

3. Authorization Request is Sent to Issuing Bank

Issuing banks essentially represent the credit card associations for credit card transactions. These banks will review the following information:

  • Credit card number

  • Credit card expiration date

  • Customer’s billing address

  • Credit Card CVV number

  • Purchase amount

4. Issuing Bank Authorization Response

At this point, the issuing bank has the information they need to issue a response. This can either result in a request being approved or a request being declined. Typical reasons for a request being declined include suspicious purchase activity, exceeding a credit limit, a hold being placed on a credit card by institutions such as rental car companies or hotels, or potential identity theft.

The majority of credit card purchases are approved at this stage. As we are about to find out, any declined credit card purchase requests will give additional reasons for that decision.

5. Authorization Code is Returned to the Merchant

Authorization Code is Returned to the Merchant

Each credit card transaction will come with an authorization code. This code will act as a record of the transaction for both the merchant and the customer, as well as proof that the transaction was either approved or denied.

6. Goods are Transferred

Assuming that the transaction was approved and an authorization code was returned, the merchant will then give the goods and/or service(s) to the customer. The transaction is essentially completed at this point, but funds have not yet been transferred to the merchant.

5. Authorization Code is Returned to the Merchant

Each credit card transaction will come with an authorization code. This code will act as a record of the transaction for both the merchant and the customer, as well as proof that the transaction was either approved or denied.

6. Goods are Transferred

Assuming that the transaction was approved and an authorization code was returned, the merchant will then give the goods and/or service(s) to the customer. The transaction is essentially completed at this point, but funds have not yet been transferred to the merchant.

7. Credit Card Purchase Settlement

And that is where settlement comes into play. Funds are transferred from the issuing bank, through the credit card network, and onto the merchant’s acquiring bank. At this point, the transaction is 100 percent complete. Merchants can typically expect to receive their funds within 2-4 business days after the purchase date.

Debit Card Processing vs. Credit Card Processing

Debit Card Processing vs. Credit Card Processing

The first question we usually get after going through the credit card transaction is this: are debit cards processed in the same way? The short answer is no, debit card purchases are quite different. Whereas debit card purchases are more akin to electronic wire transfers, credit card purchases are based on promised funds for the future.

Debit card processing is also generally less expensive for merchants as they avoid many of the costly credit card processing fees. Debit card transactions commonly require a PIN, which is a more direct way of seeking purchasing authorization directly from the cardholder’s bank. Some banks do charge processing fees for debit cards, but it is less frequent and in lesser amounts than typical credit card processing fees.

Credit Card Payment Processing with True Merchant

True Merchant is proud to offer payment processing solutions which are simple, secure, and supported by a qualified team of industry professionals. Our products range from online payment solutions, credit card machines, mobile credit card machines, and of course payment processing.

At True Merchant, we understand that choosing a payment processing service is not what most business owners look forward to. It can be daunting, confusing, and it isn’t the most thrilling part of operating a business. However, working with a well-established payment processor will allow your business to meet customer expectations for convenience, stay protected from fraudulent activity, and avoid costly fees.

This is a very important decision for any business. Contact True Merchant today to learn about how our payment processing services can help your business reach the next level!

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