A Beginners Guide to Credit Card Processing

What does it take to complete a credit card transaction? We break down who is involved in the process to help you, the merchant, understand.

There are three main players when it comes to processing credit and debit card payments, whether online, via phone sales, or in person. On the one end is you, the business owner or merchant. On the other end is your customer. And in between is a lot of technology that connects the two.

1. The merchant. 
In order to accept credit and debit card payments from customers, as a business owner, it’s likely you’ll need a merchant bank (sometimes called an acquirer) that accepts payments on your behalf and deposits them into an account they provide.
2. The customer.
 Similarly, in order for your customer to pay for your goods and services, they need a credit or debit card. The bank that approves them for the card (and lends them the cash to pay you) is called the issuing bank.
3. The technology. 
In the middle are two technologies that enable you and your customer to transact.
- The payment gateway. A software that links your POS or website’s shopping cart to the processing network.
- The payment processor (or merchant service), which does all the heavy lifting: moving the transaction through the processing network, sending you a billing statement, working with your bank, etc.

The authorization process goes something like this:

1. The customer buys a good or service from you with a credit or debit card.
2. That information goes through the payment gateway, which encrypts the data to keep it private, and sends it to the payment processor.
3. The payment processor sends a request to the customer’s issuing bank to check to see that they have enough credit to pay for your stuff.
4. The issuer responds with a yes (an approval) or a no (a denial).
5. The payment processor sends the answer back to you that the sale was approved and also tells your merchant bank to credit your account.

All of the above takes place within a few seconds.

The second piece of the process (where you get paid!) is the settlement:
1. The card issuer sends the funds to your merchant bank, which deposits the money into your account.
2. The funds are available.

 The settlement process can take a few days. Sometimes, your bank lets you access your money before it’s even sent to them. They also might keep a portion in your account that you can’t touch, just in case the customer returns things later (called a reserve in payments speak).

Now that you know who is involved checkout our post on Understanding Payment Processing Fees.

Sources Cited
PayPal "Breaking down the credit card processing fees"


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