How Does Credit Card Transaction Processing Work?

Jul 09, 2018

Making a credit card purchase may seem like a quick transaction, but in all actuality, it is a complex process. Credit card transactions are processed and settled due to the coordination between of these entities: an issuer, an acquirer, a processor, a merchant, a cardholder, and the card schemes. To understand their parts in credit card processing, it’s best to explain each player’s individual roles.

Merchant: This is the bricks-and-mortar store or website that sells products or services. In addition to accepting credit and debit card payments, it sends card data and requests authorization from the cardholder’s issuer.

Cardholder: This is the purchaser who is using a card to pay for products or services.

Issuer: An issuer is a bank or financial institution that issued the credit card that is being used in the transaction. It receives the payment authorization request from the credit card network and either approves or declines the transaction.

Acquirer: An acquirer or acquiring bank receives payment authorization requests from merchants and then, sending that information to the issuer. Finally, it provides the issuer’s response to the merchant.

Acquiring processor: If the acquirer doesn’t handle the credit card processing, it sends it to a third-party processor. In this case, the processor provides a services that allows a store/retailer to accept credit or debit cards. Additionally, it sends payments details to the credit card schemes or network. After this, the processor forwards an authorization back to the acquirer.

Credit card network: Members of the network, such as Visa, Discover, and MasterCard, process credit card payments and govern interchange fees. The network’s role in card transaction processing is that it receives credit card payment information from the processor and then forward the authorization request to the issuer. After it receives the issuer’s response, it forwards it to the processor.

Issuer: Whether a bank or financial institution, an issuer receives the payment authorization request from the credit card network and then, opt to approve or deny the transaction. It’s likely hard to imagine but from the time that buyers swipe credit cards until they receive receipts takes less than three seconds. With that being said, the entire credit card process can be broken down in three steps: authorization, authentication, and clearing and settlement.

Authorization Stage: First, the cardholder presents a credit card to the merchant for a purchase. Once submitted, the merchant needs to get approval for payment from the issuer. After the card is swiped, the credit card information is sent to the acquirer, and then, details are sent to the credit card network. The network clears the payment and requests authorization, which includes the credit card number, billing address, card security code, card expiration date, and payment amount, from the issuer.

Authentication Stage: During this stage, the issuer uses fraud protection tools to validate the customer’s credit card. Then, the issuer receives the payment authorization request. Then, the issuer validates the credit card number, monitors to ensure that there is an adequate amount of funds available, and that the card matches the billing address and the CVV number. The issuer, then, either approves or denies the transaction and sends the determination back to the merchant. Once the authorization is received, the issuer places a hold for the amount on the cardholder’s account. From here, the merchant’s point-of-sale will collect all authorizations to be processed in a batch.

Clearing and Settlement Stage: The clearing and settlement happen simultaneously. During the clearing, the transaction is posted to the cardholder’s monthly credit card billing statement and the merchant’s statement. At the end of a transaction, the merchant sends any approved authorization in a batch to the acquirer. The batched information is sent to the card network for settlement. From there, the network pushes each approved purchase to the right issuer. Within no more than 48 hours of the transaction, the issuer transfers funds minus the interchange fees. The network pays the acquirer and it credits the merchant’s account for cardholder purchases. Then, the issuer posts the transaction information to the cardholder’s account.

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Having a merchant account allows an account holder to take advantage of merchant cash advances. When a merchant is approved for an advance, the business agrees to receive a lump sum of cash in exchange for an agreed-upon percentage of future credit card sales.

Pricing varies depending on the merchant’s industry, past credit card processing history, the type of business seeking the account, average ticket sales, and average transaction volumes.

Yes, EMB works with merchants who are building their credit, as well as those who have poor credit. EMB also approves merchants that have no credit card processing history and businesses that have lost their merchant accounts due to high chargebacks.

Several factors influence a merchant’s risk level. Though only one factor likely will not get a merchant classified as high risk, a combination of these may: business size, location, and industry, credit score, credit card processing history, a industry’s reputation for excessive chargebacks, a prior history of high chargeback ratios, and whether a merchant exclusively sells online.

Virtual terminals are stationed on a merchant’s website, making it easy for customers to make a payment or purchase online. Merchants or a payment processor can easily set up virtual terminals, so online businesses can accept credit and debit card and e-check transactions.

A merchant account is a business account with an acquiring bank. Without this business account, which actually works more like a line of credit, a merchant cannot accept and process credit and debit card transactions. Businesses need a merchant account to accept major credit cards via a static point-of-sale terminal, mobile card reader, or through a virtual payment gateway.

After filling out EMB’s simple online application and submitting any necessary, requested documents, many merchants get approved within 24 and 48 hours.

EMB specializes in working with high-risk merchants. EMB works with many merchants, including but not limited to businesses in these industries: gambling and gaming, adult entertainment, nutraceuticals, vaping and e-cigarettes, electronics, tech support, travel, high-end furniture, weight loss programs, calling cards, e-books and software, and telecommunications.

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