Credit card processing is a four-stage process that involves the merchant, the issuer or financial institution that provides the credit card, and the customer. If you are a credit card user or a business owner who wants to accept credit card payments, understanding how credit cards are processed is a worthwhile educational endeavor.
Authorization
When a card is handed over to a merchant to either be swiped or manually entered, the card's account information is sent via a merchant account or credit card processing network to the sponsoring financial institution, who determines if sufficient credit exists on the card.
If the purchase amount is approved, an authorization number is given to the merchant, and the financial institution subtracts the credit from the cardholder's available credit limit. If the financial institution determines the card does not have sufficient funds or credit, the request is denied and the cardholder must use another form of payment.
Funding
During the funding phase, the financial institution that sponsors the cardholder's card transfers money to the financial institution that sponsors the merchant. The sponsoring institution then sets aside these funds awaiting the "batch" and "clearing" phases discussed in the following two sections.
Batching
At the end of a day, the merchant gathers all the day's authorization numbers that been provided to him by the credit card processing or merchant account company in a "batch" or bulk form. This batch is sent at the end of each business day to the merchant account provider in order to receive payment for the purchases.
Clearing
Clearing begins when the credit card processing company sends the batch electronically through a card network, who then distributes each transaction to the appropriate credit card issuer. Any appropriate fees are then subtracted, and the balance is electronically deposited into the merchant's account.
Fees
Credit card processing companies charge merchants a host of fees in return for providing both the processing service and the equipment to accept credit cards. Most companies charge a per transaction fee whose cost will depend on whether the transaction was conducted by Internet, phone or a point-of-service terminal. There are also daily batch fees as well as monthly processing and annual membership fees.
Member Comments