How Does Credit Card Processing Work
It can be difficult to understand how online credit card processing is actually done, a labyrinth of epic proportions for some. Various channels and steps and a whole lot of complicated jargon make it seem much more complex than it really is. To spell the process out for laymen, listed below is a simplified summary of the whole procedure.
There are four main steps involved in credit card processing:
- Authorization
- Batching
- Clearing
- Funding
Authorization:
This is basically the approval that may be needed for the transaction that is stored with the order placed. Authorization begins when:
- The cardholder or the shopper makes a request of purchase from a merchant or the business owner.
- The business merchant then submits or forwards the request to the acquiring bank or what is often known as the Merchant Bank. These merchant or acquiring banks create accounts to allow the businesses to accept and charge the credit and debit cards.
- The acquiring bank then sends a request to the issuers or the cardholder’s bank via an appropriate card network to be accepted or declined to give permission per say for the transaction to proceed.
- The issuer receives the requested transaction information and replies by approving or declining the transaction by sending an authorization code to the acquirer if there is valid balance available.
- The acquiring bank then authorizes the transaction, the merchant terminal receiving the response code and storing it while the cardholder or shopper receives their purchase.
Batching:
Sorting out all the purchases of the day, the merchant’s terminal stores all of the authorized sales in organized batches. These batches are usually sent by the merchant to the acquirer bank at the end of the day to receive payment.
Clearing:
Clearing begins with the merchant sending the batch of approved authorizations to the acquiring bank via a card network.
- The card network then reconciles and distributes the authorizations to each appropriate issuer or cardholder’s bank.
- The issuer bank then basically debits the issuer of the appropriate amount while crediting the merchant all the while subtracting the interchange fee which is shared with the network.
- The card network will then route the amount to the acquirer or the merchant’s bank.
Funding:
The fourth and final step in the online processing of a credit card, this is when the acquiring bank subtracts its own discount rate and pays the remainder of the amount to the merchant. The cardholder or shopper is then billed. The cardholder is now responsible for paying his or her issuing bank for the purchase along with any interest or fee associated with the card plan.
These four steps can help get a great understanding on how credit card processing work.
