How Credit Card Payment Processing Works
Important Terms Explained:
To understand the process better, here are some of the terms and steps involved, what they are and how they work:
Acquirer – a bank, which is often a 3rd party provider, who processes and settles merchant credit card payments. This can be a bank providing your merchant account or a service that provides it to your processing company. The acquirer works with the credit card issuer.
Authorization – is the first step that happens after the credit card is swiped. The purchase and card information are sent to the acquirer who, in turn, sends the same information to the credit card issuer. The credit card issuer then accepts or declines the transaction. If accepted, an authorization code is generated and the purchase transaction is continues to the next step, namely: batching.
Batching – is the review process done by a merchant on all credit card transactions for the business day. The review process involves ensuring all credit card transactions are authorized and signed by the cardholder. After the review process, the merchant sends the information as a batch to the acquirer to receive clearing for payment.
Cardholder – he is the customer as specified on the credit card, the customer so to speak.
Card network – these are networks that act as intermediary between the acquirer and the issuer. Card networks transfer the information originating from the acquirer to the issuer about the purchase. This happens in the authorization process.
Clearing – the third step in the payment process which happens after the acquirer sends the batch information through the card network to the issuing bank. The card network acts as a router depending on the credit card issuer found on the purchase detail. This process permits revenues for both the issuing bank and the card network called the interchange fee. After deduction of interchange fees, the issuing bank sends the information back to the acquirer through the same card network used.
Discount fee – this fee is paid for by merchants to the acquirer to cover processing costs.
Funding – the fourth step in the credit card payment process. This involves the acquirer sending back the transaction information to the merchant less the discount fee. The merchant receives the remainder of the payment and is now considered paid. This generates the cardholder’s billing statement and accounts are funded appropriately.
Interchange fee – the fee charged by card networks and card issuers to the merchants. This fee is regulated to about 1 to 3 percent of the total purchase amount and covers the costs associated with credit card acceptance.
Issuer – the financial institution who issues credit card products to its customers. Examples of major issuers include Discover, Amex, Visa and Mastercard.
Using the terms provided above as a guide, here is what takes place during the payment cycle.
Credit Card Payment Processing Cycle:
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Authorization follows this flow:
- The cardholder submits the purchase request to the merchant.
- The merchant submits the purchase request to the acquirer.
- The acquirer sends the request to the card issuer though the card network.
- The card issuer generates an authorization code for approved purchase.
- The card issuer sends the authorization code to the acquirer through the card network.
- The acquirer gets the same information to the merchant.
- The cardholder gets the purchased product and checks out.
Batching has two steps and involves the merchant and the acquirer only:
- The merchant reviews all card transactions at the end of the business day.
- The merchant sends the batch information to the acquirer to receive the corresponding payment amounts.
Clearing has these steps involving the acquirer, the card network, and the card issuer:
- The batch information is sent by the acquirer to the card network.
- The card network sorts the batch and sends requests to the card issuer.
- The card issuer deducts the interchange fee and sends the information back to the card network.
- The card network sends the information back to the acquirer.
Funding involves the acquirer and the merchant on the final process:
- The acquirer deducts its discount fee and sends the remaining payment amount to the merchant.
- The merchant receives the payment in net amount after deductions of the processing fees.
- The process above lets a cardholder know that for every transaction he makes, all parties are paid their corresponding costs and payments are processed and funded. The credit card payment cycle is intimidating at first but after working with the process it becomes second nature.
Knowing how merchant services work is the key to avoiding unnecessary penalties and fees.