Accepting payments almost certainly means processing credit cards. But how much do you know about the process after your customer clicks the ‘pay’ button? The payment is routed through many systems in the milliseconds that follow. If it is successful, the customer can go about their business, but if it isn’t, it can be frustrating for everybody.
The more you know about credit card processing, the more control you have over its outcome.
Key Players
Cardholder
A bank cardholder obtains a credit or debit card from a card issuing bank. They then present the card to a merchant to pay for goods or services.
Issuing Bank (Cardholder Bank)
An issuing bank issues credit cards to consumers. The issuing bank is also a member of payment card associations such as Visa and MasterCard card. They transfer funds to the acquiring banks for purchases that their cardholders make. Afterwards, the cardholder is responsible for repaying their issuing bank according to the agreement they signed.
Card Associations (Visa and MasterCard)
Visa and MasterCard aren’t banks. Instead, they function as the governing body of a community of financial institutions, ISOs and MSPs that work together in association to support credit card processing and electronic payments.
Merchant
Merchants are businesses that maintain merchant accounts that allow customers to pay them with credit or debit cards for goods or services provided.
Acquiring Bank (Merchant’s Bank)
Often referred to as a merchant bank, acquiring banks contract with merchants to create and maintain accounts (called merchant accounts) that allow the business to accept credit and debit cards. Acquiring banks provide merchants with equipment and software necessary for accepting credit cards as well as handling customer service concerns regarding card acceptance. They also deposit funds from credit card sales into a merchant’s account.
To conduct and monitor the day-to-day activities of their merchant accounts, acquiring banks often enlist the help of third-party independent sales organizations (ISO) and membership service providers (MSP).
How Does Credit Card Processing Look In Motion?
Authorization
- Cardholders present their cards (or other secure methods) to merchants in exchange for goods and services.
- An authorization request is sent to the payment processor by the merchant.
- The payment processor submits the transaction to the card association, eventually reaching the issuing bank.
- Authorization requests are sent to the issuing bank, which includes parameters such as CVV, AVS validation, and expiration date.
- The issuing bank approves or declines the transaction.
- Once the approval or denial status has been determined, the issuing bank forwards it to the card association, the merchant bank, and then to the merchant.
Settlement and Funding
- Batches of authorized transactions are sent by the merchant to the payment processor.
- Transaction details are passed to the card associations by the payment processor. They then communicate the appropriate debits with the issuing banks in their network.
- Cardholders have their accounts charged by the issuing bank for the amount of the transaction.
- The issuing bank then transfers the funds for the transaction to the merchant bank, minus interchange fees.
- Money is deposited into the merchant’s account by the merchant bank.
