How Credit Card Payment Work

The process of credit card transactions is simple It looks very simple: Customers swipe their cards, and before they know it, the transaction is done. But beneath that ease there is a very complicated procedure or stage that is not known in the appeal which is what you see.

Knowledge of the process of credit card transactions is very important for small business owners because payment processing is one of the biggest expenses that traders have to deal with.

That's why this time we provide how the credit card transaction processing works with each swipe - from the participants to get approval or rejection.

Stages of Credit Card Transaction Process

Credit card transactions are processed through multiple platforms, including brick and mortar stores, e-commerce stores, wireless terminals, and telephone or mobile devices. The whole cycle - from the moment you slide your card through the card reader until the receipt is generated - takes place in two to three seconds. By using brick and mortar store purchases as models, we have broken down the transaction process into the following three phases:

1. Authorization

In this case, the merchant must obtain payment approval from the issuing bank.

Cardholders submit their credit cards for payment to the merchant at the point of sale.
After swiping their credit card at the point of sale terminal (POS), the customer's credit card details are sent to the acquiring bank (or acquired processor) via internet connection or telephone line.
The acquiring bank or processor forwards credit card details to the credit card network.
The credit card network deletes the payment and requests payment authorization from the issuing bank. Authorization requests include:
credit card number
Card expiration date
Billing address - for validation of Address Verification System (AVS)
Card security code - CVV, for example
Amount of payment

2. Authentication

the issuing bank verifies the validity of the customer's credit card using fraud protection tools such as Address Verification Service (AVS) and card security codes such as CVV, CVV2, CVC2 and CID.

The issuing bank receives a payment authorization request from the credit card network.
The issuing bank validates the credit card number, checks the amount of funds available, according to the billing address with the one in the file and validates the CVV number.
The issuing bank approves, or refuses, transacts and resends the appropriate response to the merchant through the same channels: the credit card network and acquires the bank or processor.
Once the merchant accepts the authorization, the issuing bank will keep the purchase amount in the cardholder's account. The merchant POS terminal will collect all approved authorizations for processing in the "batch" at the end of the business day.
The merchant gives the customer a receipt to complete the sale.

3. Clearing & Settlement

Transactions are posted to monthly cardholder credit card statement and merchant statements. It happens simultaneously with the settlement stage.

At the end of each business day, merchants send approved authorizations in batches to the bank or acquiring processor.
The acquiring processor directs rock information to the credit card network for completion.
The credit card network forwards any approved transaction to the appropriate issuing bank.
Usually within 24 to 48 hours of transactions, the issuing bank will transfer the fund minus the "interchange fee", which is shared with the credit card network.
The credit card network pays the acquiring bank and earns a percentage of each of the remaining funds.
Banks that acquire merchant account credit for cardholder purchases, less "discount rate merchants."
The issuing bank sends the transaction information to the cardholder's account. The cardholder receives the statement and pays the invoice.

Credit Card Processing Fee

the reason why some merchants only accept cash or require a minimum purchase amount before permitting the use of credit card is Because Merchant must pay the price to accept credit card payment. Therefore, most will look for the cheapest credit card processing rate or mark their product prices so that customer payments can absorb card processing fees. Credit card processing rates will vary.

They are usually charged a fixed fee, a cost per transaction or a volume based fee. Here we will explain the main cost only on credit card processing.

Merchant Discount Rate: Merchants pay this fee to receive credit card and recipient service payments from processor acquisition. Usually between 2% and 3% (online merchants pay a higher end) - up to 5% - out of total purchase price after sales tax is added. Also known as cost discount, tariff consists of several components: