The credit card transaction process, on the surface, seems to be very simple – the customer swipes the card, and within seconds the transaction is completed. However, behind every swipe the credit card makes, is a procedure that is more complicated than what the eye sees.
Although getting familiarized with the processing of a credit card transaction may not seem useful, but it provides a great insight into the workings of modern commerce and the ultimate prices that we swipe our card for at the counters.
Credit Card Transaction Participants
Before understanding the process of a transaction, it is better to familiarize yourself with the participants involved:
- Cardholder: The person who swipes the card for the purchase.
- Merchant: The store vendor who sells the services or goods to the cardholder and accepts the card payment.
- Acquiring Bank or Merchant’s Bank: The bank responsible for receiving authorization requests from the merchant and sending them to the issuing bank.
- Acquiring Processor or Service Provider: This acts as an arm of the acquiring bank by providing a service or device that allows the merchants to accept card payments and send card payment details to the credit card network.
- Credit Card Network: They operate the networks that process card payments worldwide. Eg: Visa, Mastercard, etc.
- Credit Card Issuer or Issuing Bank: This is the provider of the credit card involved in the transaction. It receives the request for authorization from the network and either approves or declines the transaction.
Credit Card Transaction Process
Transactions on a credit card are processed through many platforms such as a credit card purchase at a brick-and-mortar store, transactions for online credit cards, using a wireless terminal, etc. The entire cycle takes place within seconds. Below mentioned is the cycle of how your credit card transaction is processed when you make a purchase at a brick-and-mortar store.
Step 1: Authorization
In this stage, the merchant must get approval for the payment from the issuing bank.
- The cardholder provides the credit card for payment to the merchant.
- Once the credit card is swiped on a point of sale terminal, the card details are sent to the acquiring bank or processor using an internet connection or phone line.
- The acquiring processor or bank forwards the card details to the network of the credit card.
- The network then clears the payment and requests the issuing bank to authorize the payment. The authorization request includes details such as the credit card number, credit card expiration date, billing address, card security code, and payment amount.
Step 2: Authentication
In this stage, the issuing bank will verify the credit card validity using fraud protection tools and card security codes.
- The issuing bank gets the payment authorization request from the network of the card.
- The issuing bank validates the information on the card.
- The issuing bank declines or approves the transaction and then sends a response back to the merchant using the same channels.
- When the merchant receives the authorizes the transaction, the issuing bank holds the amount on the cardholder’s account.
- The merchant provides the customer with a receipt to complete the sale.
Step 3: Clearing and Settlement
In this stage, the transaction is reflected in both the statement of the cardholder and the statement of the merchant. It occurs simultaneously with the settlement.
- As each business day ends, the merchant sends a batch of approved authorizations to the acquiring processor or bank.
- The acquiring bank or processor routes the information to the network of the credit card for settlement.
- The network then forwards each approved transaction to the issuing bank.
- Within a couple of hours, the issuing bank will transfer the amount after deducting an interchange fee.
- The acquiring bank or processor credits the account of the merchant for the purchase amount after deducting a merchant discount rate.
- The issuing bank or processor will post the information of the transaction to the account of the cardholder. The cardholder then receives the monthly statements and pays the bill.
The Bottom Line
While filling out the credit card application it is good to have some knowledge about how your transaction will be processed in the future. If you are an existing credit cardholder, it may excite you to know how the purchases that reflect in your statement are processed.