Get expert advice on how credit card processing works
Accepting credit cards may be as easy as swiping, or dipping, customer cards and receiving the funds in your bank account a few days later, but there is a lot that happens behind the scenes during a credit card transaction. To fully understand how credit card processing works, you need to understand the major players involved in each credit card transaction and what goes into the payment process itself.
The major players of a credit card transaction
- Cardholder. This is a person who obtains a credit or debit card from a card issuing bank per an agreement/terms of service, and then uses the card to pay for goods or services at merchant locations.
- Merchant. Any type of business that accepts card payments in return for their goods or services.
- Acquiring bank. Also known as the merchant bank, the acquiring bank contracts with merchants to establish and maintain merchant accounts that allow the merchant to accept card payments. Note that the acquiring bank may have a processor that performs these functions on their behalf.
- Issuing bank. These are the banks and credit unions that issue debit and credit cards to cardholders/consumers.
- Card associations. These are the card brands such as Visa and MasterCard.
The card associations:
- Act as a clearinghouse for their respective card brand
- Act as a governing body of payments processing
- Set interchange rates and qualification guidelines that everyone must follow
- Act as the arbiter between issuing banks and acquiring banks
- Maintain and boost their card network and card brand
How credit card processing works
- The cardholder presents his or her payment card to the merchant in exchange for goods or services.
- The merchant sends a batch of approved authorizations (usually at the end of their business day) to their acquiring bank.
- The acquiring bank reconciles and transmits the batch of authorizations through interchange.
- The acquiring bank credits the merchant’s bank account via ACH (automated clearinghouse) for card transaction funds (minus interchange.)
- The acquiring bank debits the merchant’s bank account via ACH for processing fees, either on a daily or monthly basis depending on their services agreement.
- The card network debits the issuing bank’s account and credits the acquiring bank’s account for the net amount of the authorized transactions (having subtracted out interchange and network fees).
- The issuing bank pays the acquiring bank for its respective customers’ transactions.
- The cardholder must pay his or her issuing bank back for transactions plus any accrued interest and fees per the terms of their agreement.
For more detailed information on the process of a credit or debit card transaction, contact a reputable credit card processing company.