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Credit card processing is the system by which businesses accept and process payments made with credit cards. It involves a series of steps and parties that work together to authorize, authenticate, and settle the transaction between the cardholder (customer) and the merchant (business).
Here's an overview of the key components and steps in credit card processing:
1) Cardholder:
The customer who uses a credit card to make a purchase.
2) Merchant:
The business that accepts credit card payments for goods or services.
3) Point of Sale (POS) system or payment gateway:
The technology or software used to capture and transmit the credit card information for processing.
4) Acquiring bank or merchant account provider:
The financial institution that partners with the merchant to process credit card transactions.
5) Card networks:
Organizations like Visa, Mastercard, American Express, and Discover that set the rules and regulations for card transactions and facilitate communication between the parties involved.
6) Issuing bank:
The financial institution that issues the credit card to the cardholder.
Steps in credit card processing:
1) Authorization:
When a customer makes a purchase, the merchant's POS system or payment gateway captures the credit card information and sends it to the acquiring bank.
2) Authentication:
The acquiring bank forwards the transaction details to the card network, which routes it to the issuing bank for verification. The issuing bank checks if the card is valid and has sufficient funds or credit available.
3) Approval or decline:
The issuing bank sends a response (approval or decline) back through the card network and acquiring bank to the merchant. If approved, the merchant completes the sale.
4) Settlement and funding:
At the end of the day, the merchant submits all approved transactions in a batch to their acquiring bank, which then submits them to the respective card networks for payment. The card networks redistribute the funds to the issuing banks, which in turn deduct the transaction amounts from the cardholders' accounts. The acquiring bank deposits the funds, minus any fees, into the merchant's account.
Throughout this process, various fees are charged by the parties involved, such as interchange fees, assessment fees, and processing fees. The specific fees depend on factors like the type of transaction, the merchant's industry, and the credit card network involved.
