The what’s and how’s of credit card processing

Credit card processing is the name for the entire invisible set of operations that take place whenever a credit card is used either at a retail outlet, online or through mobile phones. This process takes place in several stages, and with the correct service provider, should ensure maximum efficiency, speed and security.

There are various people and virtual checkpoints involved in credit card processing. These are:
The cardholder, i.e. the person using the credit card

The merchant, i.e. the account-holder of the business accepting payment from the cardholder in exchange for goods and services.

The acquirer, who provides credit card processing services to the merchant
The card association, who works as a go-between or gateway in between cardholder and merchant. Example: Networks like VISA or MasterCard

The issuer, i.e. the bank or credit card company that issues the original credit card to the cardholder.
To ensure a completely smooth and secure transaction involving these five entities, a rather elaborate process has been designed for credit card processing.

Step 1: Authorization. Before the cardholder’s transaction is processed, a lightning-fast process of verification takes place. The transaction is transferred from the merchant account to the acquirer, who verifies the existence of the given credit card with the issuer.

Step 2: Batching. The transactions, once authorized, are grouped together in batches. After a certain time period (usually at the end of the working day), the merchant sends the entire batch of transactions to the acquirer for further processing and payment.

Step 3: Clearing or settlement: This is when the money is actually debited (i.e. taken out from) the issuer, and credited (given) to the acquirer. In this step, the batched transactions are sent by the acquirer to the card association, e.g. VISA, which manages the transaction between acquirer and issuer.

Step 4: Payment to merchant. Only after the acquirer receives payment will the merchant get paid. The merchant’s payment is slightly less than the sum paid by the cardholder, as the discount rate (percentage or amount paid to the acquirer) is deducted from it.
These are the steps involved in an uncomplicated, error-free credit card transaction online. Typically, the process takes three days. This duration can be lessened if the issuer and acquirer belong to the same company (e.g. Bank of America card holders using Bank of America’s Merchant Card Processing services).

Credit cards are becoming more and more popular by the day for businessmen. For small businesses, setting up a merchant account for credit card processing is growing viable. It allows them to gain greater functionality for the website – a shop can be maintained without having a single retail outlet.

For consumers, credit cards are extremely convenient. They can be used at times when one is short of ready cash, does not want to carry too much cash, or when buying online proves cheaper than from a retail outlet. Growing familiar with credit card processing helps to demystify the usage of a credit card, and will hopefully encourage more and more people to use them.


Content created by Radical Ancient, soon to join this blog as a contributor.