How Credit Card Processing Works

It seems all too simple. You walk up to the checkout counter, or you hit a web site’s checkout page, you whip out your credit card and – in seconds – you’ve paid for your purchase and you’re on your way.

And while it does seem simple from the shopper’s point of view, there is a lot going on behind the scenes in those few seconds between the time the merchant captures the shopper’s credit card number and the time the approval is received from the credit card issuing bank.

Let’s take a peek behind the scenes:

In the credit card world the customer is called the “Cardholder.” They receive their MasterCard or Visa credit card from what is called the “Issuing Bank.” There is no requirement for the Cardholder to have any other type of relationship with the issuing bank. In fact, in many cases the issuing bank is not the bank that the Cardholder has his or her checking account at. It is simply the bank that the Cardholder chooses to get their bank card from.

The place of business that accepts the credit card is called the “Merchant.” In order to be able to accept credit cards, the Merchant must open a “Merchant Account” with a “Merchant Bank” which is also known as a “Sponsoring Bank” or an “Acquiring Bank.”

This is the bank that receives the “Net Settlement Amount” from the Issuing Bank after the transaction is processed. The Net Settlement Amount is the amount of the actual sale minus transaction fees called the “Discount Rate.” In some instances merchants may also have to pay “Pass-through Fees” which are additional transaction fees that are charged when a transaction does not meet some particular requirement such as passing the Address Verification System (AVS) test.

Credit Card Processing Steps

1. A transaction begins when the magnetic stripe on the back of the credit card is passed through a credit card terminal, or the credit card account number is entered into the system manually by either the merchant or the cardholder. This enters the transaction information into the Processor’s network.

2. An “Authorization Request” is generated.

3. The Processor links up with the Visa/MasterCard network in order to transmit the Authorization Request to the Issuing Bank’s computer network.

4. The Issuing Bank verifies that a valid credit card number has been received and that the Cardholder has enough money available (“Open to Buy”) to fund the transaction.

5. A “hold” for that amount is placed against the Cardholder’s Open To Buy thereby reducing the amount of his or her Open To Buy for future transactions.

6. Once the approval is received a “Deposit Transaction” is transmitted which finalizes the transaction. The merchant then releases the items purchased by the Cardholder.

7. The Net Settlement Amount is deposited to the Merchant’s account usually by the end of the same business day.

When Credit Card Processing Go Wrong

There are times, however, when the process hits a snag and human beings have to get involved. Although it is 100% computerized, the Visa/MasterCard network is programmed with many “triggers” that will route the transaction to a human being for closer scrutiny when one of those triggers are pulled.

The most common triggers are:

* Unusual spending patterns that do not match the Cardholder’s normal purchases.
* Purchases of products or services that are considered to be in a “high fraud” category.
* Purchases made outside of the country where the cardholder lives. In fact, some Card Issuers require their Cardholder’s to notify them when they will be traveling outside of their home country.

What’s really amazing is not that the entire processing cycle is flawlessly repeated millions of times per hour, but that it all happens in just seconds!