Payment Processing 101: Typical Steps Associated With How Credit Card Processing Works

Need a better understanding of how credit card processing works behind the scenes when someone makes a purchase at your business?

The following provides a brief overview.

1. Cardholder Initiates a Transaction:

The process begins when a customer decides to make a purchase using a credit card. They provide the merchant with credit card details, including the card number, expiration date, and sometimes a security code (CVV/CVC)..

2. Merchant’s Point of Sale (POS) System:

The merchant’s POS system or e-commerce website collects the payment information from the customer.

3. Authorization Request:

The merchant sends an authorization request to their payment processor or acquiring bank. This request typically includes the transaction amount, card details, and other relevant information.

4. Payment Processor and Issuing Bank:

The payment processor is an intermediary between the merchant and the cardholder’s issuing bank (the bank that issued the credit card). It forwards the authorization request to the issuing bank

5. Issuing Bank Authorization:

The issuing bank receives the authorization request and performs several checks, including:

• • Validity of the card: Is the card active and not expired?
  • Sufficient funds: Does the cardholder have enough credit to cover the transaction?
  • Fraud detection: Is the transaction consistent with the cardholder’s spending habits and location?

6. Authorization Response:

The issuing bank sends an authorization response back to the payment processor. This response may include an approval or decline code and other details related to the transaction.

7. Merchant Response:

The payment processor forwards the authorization response to the merchant. If the transaction is approved, the merchant proceeds with the sale. If declined, the merchant informs the customer of the issue.

8. Transaction Settlement:

After a successful transaction, the merchant submits a batch of authorized transactions to their payment processor at the end of the business day. This is called settlement.

9. Payment Processor and Card Network:

The payment processor then communicates with the appropriate card networks (Visa, Mastercard, American Express, etc.) to facilitate the transfer of funds from the issuing bank to the merchant’s acquiring bank.

10. Funds Transfer:

The acquiring bank credits the merchant’s account with the transaction amount minus processing fees, and the issuing bank debits the cardholder’s account.

11. Statement and Billing:

The cardholder sees the transaction on their credit card statement, and the merchant receives payment for the goods or services provided.

12. Payment Clearing:

In the background, the card networks and banks work together to clear and settle all the transactions, ensuring the funds are transferred appropriately.

13. Payment Processor Fees:

The payment processor deducts fees from the transaction amount before depositing the remaining funds into the merchant’s account.

14. Reconciliation:

Merchants reconcile their daily or monthly statements to ensure that all transactions are accurate and have received the expected funds.

15. Chargebacks and Disputes:

In disputes or chargebacks (e.g., due to fraud or customer dissatisfaction), a reverse transaction is initiated, and the funds are returned to the cardholder.