How Does Credit Card Processing Work?

Here’s how credit card processing works:

Initiation: The cardholder provides their credit card information to the merchant, either by swiping, inserting, or tapping the card at a point-of-sale (POS) system or by entering the card details manually for an online transaction.

Data transmission: The merchant’s POS system or payment gateway captures the transaction details and securely transmits this information to the credit card processor.

Authorization request: The credit card processor forwards the transaction data to the appropriate card network (e.g., Visa, Mastercard), which then routes the authorization request to the issuing bank.

Approval or decline: The issuing bank verifies the cardholder’s account, checking for sufficient funds and potential fraud or security issues. The bank then approves or declines the transaction and communicates the decision back through the card network to the credit card processor.

Authorization response: The credit card processor sends the authorization response – either an approval or a decline code – to the merchant’s POS system. If approved, the merchant can complete the sale.

Settlement: At the end of the day, the merchant submits the batch of approved transactions to the credit card processor for settlement. The processor forwards the transaction details to the respective card networks.

Funds transfer: The card networks coordinate with the issuing banks to transfer the funds for each transaction to the acquiring bank, which then deposits the funds into the merchant’s bank account.

The key parties involved are the cardholder, merchant, credit card processor, card networks, issuing bank, and acquiring bank.