How Credit Card Processing Works: A

Simple Guide
Despite taking just seconds to complete, credit card processing is an incredibly complex
process that involves multiple steps to complete. This is how it works: information is
passed from the cardholder and flows through a merchant's processing company and
credit card networks to the cardholder's bank. Once that bank approves or denies the
transaction, it flows in reverse back through the same chain to the merchant to let them
know if the payment went through.

 How Does Credit Card Processing Work?

 Who Are The Main Players That Process Card Payments?

How Credit Card Processing Works: Step By Step

Credit card processing can be reduced to one of six steps. For the most part, each of
these steps is involved with transferring a cardholder's payment information and
authorization from one party to another. The primary job of the credit card processing
cycle is to determine whether a purchase has the necessary funds to be completed.
Transactions with an EMV chip credit card take on average 15 seconds to complete.
1. Consumer: The first step in credit card processing happens on the consumer level,
when a cardholder swipes, dips their card, or hands over their payment information to
the merchant.
2. Merchant: Next, the merchant accepts and collects the payment information. This
can be done in one of two ways. The payment can be accepted physically in so-called
card present transactions. This usually happens at a storefront, with some a credit card
reader. The merchant step can also happen online for card not present transactions.
Instead of a card reader, merchants use an online gateway to collect the payment from
their customer.
3. Processor: The credit card processor collects that information and is responsible for
routing that data across to the other stages, and facilitating communications between
various parties. Initially, however, their primary role is to send the payment information
to the card network.
4. Card Networks: Your customer's card will operate one of the major credit card
networks — the most common ones are Visa and Mastercard. Once the networks
receive the payment information from the processor, they pass it to your customer's
bank.
5. Consumer Bank: The cardholder's bank then receives the payment request, and
they verify whether the cardholder has the appropriate funds or credit to complete the
purchase. The bank may also run through additional security measures to verify
whether they purchase is legitimate, and not fraudulent. Once they establish that the
customer has the funds needed and that the purchase is not fraudulent, they send a
message back through the networks and through the credit card processor, allowing the
transaction to go through. Common reasons why the cardholder bank denies a
transaction include: insufficient funds in the account, a credit limit has been reached, or
the bank suspects the purchase is being made by a non-authorized user.
6. Back To The Merchant: Lastly, the message that the payment has been requested
or denied flows back through the same channels it did to get to the cardholder's bank.
When the transaction is handled in-person, this usually corresponds with a message on
the card reader like "Approved" or "Declined". Assuming a transaction is cleared, the
merchant is expected to provide the customer with whatever goods or services were
promised in return for the payment.
It's important to note that at this point no funds are released yet, meaning the
transaction is not completely settled. That is a separate process that can take up to
several days to complete, depending on the card networks involved. Generally
speaking, Visa and Mastercard transactions tend to settle faster than American
Express. The process of settling a transaction and releasing the funds from the
cardholder bank to the merchant bank involves the same players described above, with
the flow of communication being very similar.

What Are The Parties Involved In Credit Card

Processing?
Credit cards can be processed and settled thanks to the interplay between four key
players — the merchant bank (sometimes called the acquiring bank), the credit card
processor, the card networks (sometimes called the card associations), and the
consumer bank (sometimes called the issuing bank). Below we outline the exact
responsibilities and roles each of these institutions play in settling and processing credit
card payments.
Merchant Bank/Acquiring Bank. This is the bank with which a business or merchant
holds their funds. Sometimes the acquiring bank also serves as a processor, though an
increasing number of small business owners turn to third party nonbank processors, like
Square and PayPal. Merchant banks can outfit business owners with card readers and
equipment to accept cards, and they are responsible with depositing funds into the
merchant's account once a credit card sale goes through. However, their role is
increasingly shrinking, as more business owners are choosing to use third-party
independent sales organizations (ISOs). Examples of acquiring banks include: Wells
Fargo and Chase.
Credit Card Processor. Processors can be best understood as the messenger that
facilitates communication between the merchant and the cardholder's bank. They are
responsible for securing payment data, and making sure all transactions adhere to rules
set out by the Payment Card Industry Data Security Standard (PCI DSS). Credit card
processors collect a fee from merchants for providing this service. The fee can be either
fixed or some sort of percentage markup on top of the interchange fees they pass on to
the merchant at cost. Examples of credit card processors include: Square, Stripe and
Authorize.net.
Card Network/Card Associations. The card networks work with the credit card
processors to transport data between the issuing bank and the merchant. The networks
are also responsible for setting interchange and assessment fees by the networks.
While the networks set these fees, they do not collect all of them. The interchange fees,
which are the largest cost involved in credit card processing, are passed onto the
issuing bank. Networks collect the much more nominal assessment fees that, which are
usually just a fraction of what the interchange fees are. In the United States, the most
common card networks are Visa, Mastercard, American Express and Discover.
Consumer Bank/Issuing Bank. This is your customer's bank, which gave him or her
the credit card they're using at your store. The most important function of the issuing
bank is to first determine whether the cardholder has the appropriate funds to complete
a transaction, and then to release the funds so that the transaction can settle.
Depending on the type of card the consumer bank has issued (premium, rewards, etc.)
the interchange fees on these cards that are set by the networks will be higher or lower.
Generally, the more rewards a card gives the consumer, the more expensive its
interchange fee will be.