How does Credit Card Processing Work?


How does Credit Card Processing Work?

New to credit card processing? Here is how it works...

Firstly, the customer makes an order on a merchant’s e-commerce website and chooses a payment method. As a merchant, you will be provided only with the costumer’s name, billing address, credit card number, expiration date and a credit card verification number. You won't be able to physically see the credit card and to identify the credit card holder, as it is a “card-not-present” transaction. Because of that the processing rates will be higher due to a higher risk of fraud.

At this point, the information on customer’s credit card will be sent to a payment gateway which encrypts it and sends it to the merchant’s processor to process the transaction. The processor uploads the transaction data to the credit card association. Some credit card associations have the right to approve or decline the transaction by themselves (for example, American Express and Discover) and so they act as an issuing bank. On the other hand, there are also some credit card associations which can't approve or decline transactions by themselves (for example MasterCard and Visa). However, the transaction data still must be send to them, as they charge a small fee for every approved transaction (known as an interchange fee). This small fee will be paid by your processor and passed on to you later, after a transaction is processed.

Associations, which don’t have the right to approve or to decline transactions (i.e. Visa and MasterCard) route the transaction data to a credit card issuer (issuing bank or financial institutions with a specific license), who finally approves/declines a certain transaction. The transaction will be approved, if the credit card is valid, if there are sufficient funds available on the credit card and if the customer is an authorized user of the credit card.

If the transaction is approved, the process will start to flow back in the opposite way - first from a credit card issuer (issuing bank or financial institutions with a specific license) to the credit card association, then to the processor and finally back to the merchant’s e-commerce business via payment gateway. When your processor receives the funds from the customer’s issuing bank, they process the transaction. At this point all the fees from the credit card association, processor and issuing bank are cut off and the left-over of funds is deposited on your bank account.

After the valid authorization, the sale is completed and the merchant will send the customer’s order. At this stage of the process a “temporary authorization” status will be seen on the costumer’s online credit card account, until the credit card issuer releases sufficient funds to cover the customer’s order and all the fees of the parties who participated in the transaction process.

Even though this process may seem to you complicated and long-running, it is completed within few seconds, as today everything is automatized.

The final stage of this transaction process is when the processor receives the sufficient funds from the costumer’s credit card issuer to process the transaction. After the processor, credit card association and issuing bank cut off the processing fee, the merchant gets deposited the leftover funds on his or her bank account. The merchant receives the funds usually within 48 hours after the transaction was authorized. Yet this time frame can be longer. It depends on the particular processor and several other factors. For example, if the merchant’s business is considered high-risk, the time frame between the transaction authorization and funds received can be even few days.


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