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How Credit Card Processing Works

Written by: Drew Goldbaum

Article Overview: This article provides a basic explanation of how credit card processing works - from the moment a customer hands a cashier their credit card, to the point when the merchant receives the proceeds from the sale in their business bank account.

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How Credit Card Processing Works

Whenever a customer makes a purchase via credit card, their credit card information is entered, recorded and verified so that the customer can make the purchase and the merchant can ultimately receive these funds in their business bank account. The proprietor of goods and/or services either swipes the credit card through the magnetic stripe reader of a credit card terminal, manually enters the information into an Internet gateway or virtual terminal, makes an imprint of the card with an imprinter, or obtains a voice authorization for the card over the phone.

This process involves the following parties:

Cardholder: the owner of the card used to make a purchase

Merchant: the business accepting credit card payments for products or services sold to the cardholder

Acquirer: the financial institution or other organization that provides card processing services to the merchant

Card association: a network such as VISA®, MasterCard®, American Express® or Discover® that acts as a gateway between the acquirer and issuer for authorizing and funding transactions

Issuer: the financial institution or other organization that issued the credit card to the cardholder

Now that these terms have been defined, an explanation of the flow of information and money between these parties will be more easily understood. The flow of information and money between these parties (always through the card associations) is formally known as the interchange, and it consists of the following few steps:


1. Authorization
The cardholder pays for the purchase and the merchant submits the transaction to the acquirer. The acquirer verifies with the issuer (in mere split-seconds) that the card number and transaction amount are both valid, and then processes the transaction for the cardholder.

2. Batching
After the transaction is authorized it is then stored in a batch, which the merchant sends to the acquirer later to receive payment - batching out, as this is referred to, usually occurs at the end of a merchant's business day.

3. Clearing and settlement
The acquirer sends the transactions in the batch through the card association (Visa®, for example) which debits the issuers for payment and credits the acquirer. In effect, the issuers pay the acquirer for the transactions. As with authorizations, this process takes mere seconds.

4. Funding
Once the acquirer has been paid, the merchant receives payment. The amount the merchant receives is equal to the transaction amount minus the discount rate, which is the fee the merchant pays the acquirer for processing the transaction, and any other miscellaneous fees charged for the payment processing.

In the event of a chargeback (when there's an error in processing the transaction or the cardholder disputes the transaction), the issuer returns the transaction to the acquirer for resolution. The acquirer then forwards the chargeback to the merchant, who must either accept the chargeback or contest it.

The entire process - from authorization to funding - usually takes about 3 days. However, Merchant Card Processing from Bank Associates Merchant Services takes just 12 hours.

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Home > Retail > Drew Goldbaum > How Credit Card Processing Works
Article Tags: account, card, credit, ecommerce, merchant, online, payments, processing, services

About the Author: Drew Goldbaum
RSS for Drew's articles - Visit Drew's website

My name is Drew Goldbaum and I am the Director of Operations for Bank Associates Merchant Services. BAMS is an ever-growing merchant services provider with extensive experience in the credit card processing industry. Our corporate headquarters is based in the business center of the world – New York City – allowing us to stay one step ahead of our competitors by offering the most up-to-the-minute electronic payment solutions. We can seamlessly provide you with: Retail Credit Card Processing, eCommerce Processing with Internet Gateways & Virtual Terminals supporting all major credit and debit cards.  Bank Associates Merchant Services provides eCommerce processing and online merchant accounts. Enable your business to accept payments through a variety of payment gateways and online payment services. If you are looking for quality, reliability and technological support, BAMS is the right credit card processing services provider for your business.


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More from Drew Goldbaum
How to Choose the Best Merchant Services Provider
Credit Card Processing Accounts
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