Credit card processing is the behind-the-scenes work that occurs when you use your credit card to make a purchase. It seems like a simple enough process – you hand over your card, the merchant runs it through a machine, and you’re on your way – but there’s actually quite a bit of technology and financial infrastructure that makes it all happen.
In this article, we’ll take a look at what credit card processing is, how it works, and some of the different players involved in making sure that every time you use your card, the transaction goes smoothly.
What is Credit Card Processing?
At its most basic, credit card processing is the transfer of money from a credit card issuer to a merchant, in exchange for the goods or services that have been purchased.
However, there’s a lot more that goes on behind the scenes to make sure that the transaction is completed successfully. Credit card processing generally involves four steps:
1. Authorization: This is the first step in the process, and it’s when the credit card issuer approves the transaction. The issuer will check to see if the cardholder has enough available credit to cover the purchase, and if so, will provide an authorization code.
2. Capture: Once the authorization is obtained, the next step is to capture the funds. This is when the actual money is transferred from the cardholder’s account to the merchant’s account.
3. Settlement: The settlement is the process of finalizing the transaction and making sure that all of the funds have been properly transferred. This usually occurs overnight, so that the merchant has access to the funds the next day.
4. Funding: Once the settlement is complete, the merchant will receive the funds from the transaction, minus any fees that may be associated with processing the credit card.
How Does Credit Card Processing Work?
Now that we’ve looked at the basic steps involved in credit card processing, let’s take a more detailed look at how it actually works.
When you use your credit card to make a purchase, the first thing that happens is that the merchant will send a request for authorization to the credit card issuer. This request will include information such as the amount of the purchase, your credit card number, and the expiration date of your card.
Once the issuer receives this information, they will check to see if you have enough available credit to cover the purchase. If you do, they will approve the transaction and send an authorization code back to the merchant.
Once the transaction is authorized, the next step is for the merchant to capture the funds. This is when the actual money is transferred from your account to their account. In most cases, this happens automatically, and you’ll see the charge on your credit card statement within a few days.
Once the funds have been captured, the transaction is considered settled. However, it can take a day or two for the money to actually be transferred into the merchant’s account. This is why you may not see the charge on your credit card statement immediately – it can take a few days for the settlement process to be completed.
Once the transaction is settled, the merchant will receive the funds from the sale, minus any fees associated with processing the credit card. These fees can vary depending on the type of card being used and the merchant’s agreement with their credit card processor, but they typically range from 1-3% of the total transaction.
Who’s Involved in Credit Card Processing?
There are a few different players involved in credit card processing, each with their own role to play in making sure that your transactions go smoothly.
- Credit Card Issuers: The first player is the credit card issuer. This is the bank or financial institution that provides you with your credit card and extends credit to you.
- Credit Card Processors: The second player is the credit card processor. This is the company that handles the actual processing of credit card transactions, and typically charges a small fee for their services.
- Merchants: The third player is the merchant. This is the business that you’re making a purchase from, and they will usually be the ones who pay the credit card processing fees.
How to Choose a Credit Card Processor?
If you’re a merchant, one of the most important decisions you’ll make is choosing a credit card processor. There are a few things you should keep in mind when making this decision, such as:
1. Fees: One of the most important things to consider is the fees charged by the processor. These can vary depending on the type of card being used and the merchant’s agreement with their processor, but they typically range from 1-3% of the total transaction.
2. Compatibility: Another thing to keep in mind is compatibility. You’ll want to make sure that the processor you choose is compatible with the type of credit card you accept, as well as the point-of-sale system you use.
3. Customer Service: Finally, it’s important to consider customer service when choosing a credit card processor. You’ll want to make sure that you’re working with a company that is responsive and helpful, in case you ever have any questions or problems.
The Bottom Line
Credit card processing is a complex process, but understanding the basics can help you make sure that your transactions go smoothly. There are a few different players involved in credit card processing, each with their own role to play. The most important thing for merchants to consider when choosing a credit card processor is the fees charged by the processor. compatibility, and customer service.