If you are considering getting credit card processing set up for your business, whether it’s online, or in a physical brick and mortar store, understanding how credit card processing works is the first step to understanding how it will affect your business and what you will need to get started. Let’s review the basic structures of the ecosystem associated with how credit card processing works.
Meet the Players
One of the keys to understanding how credit card processing works is understanding all of the players involved. Even though a credit or debit card transaction only takes seconds to approve or deny, there are several players in the game. The customer and the merchant are only the starting and end points.
- The customer: The person whose card is swiped.
- The merchant: The business that ends up with the money in exchange for the goods or services provided to the customer.
- The payment gateway: The equivalent of the point-of-sale (POS) machine you’d swipe your card in if you visited a traditional brick-and-mortar store.
- The acquiring bank’s processor: The payment processor the merchant’s bank uses for credit card processing.
- The credit card interchange: The place where everything comes together for credit card processing and collection of fees.
- The customer’s credit card issuer: The bank that issued the customer’s credit card. For example, a customer who has a Visa® may have it issued from one of many local or national banks.
- The merchant’s acquiring bank: The bank that issued the merchant account, where the merchant can withdraw funds.
How Credit Card Processing Works
To better illustrate how credit card processing works, let’s assume you are the customer, and you visit your favorite online merchant to purchase $100 worth of goods. From the moment you press the “submit order” button, your money starts a very quick journey through several hands that ends up shaving at least three dollars off the pot. How much money is removed from the transaction amount depends on fees, which are determined by a variety of factors, so we’re using this three-dollar fee as an estimate.
After clicking “buy now” or “submit order” the transaction first reaches the payment gateway, taking about ten cents off the top. This routes the transaction to the appropriate processor, which takes another eight cents or so.
The processor then sends the payment to the credit card interchange, taking about another nine cents in fees.
Once credit card processing moves through the interchange, the next step in how credit card processing works is the issuing bank, which tells you whether or not the funds are available in the customer’s account. At this point, about $1.93 will be taken off the top for fees. If the customer account lacks the funds necessary to cover the transaction, at this point it is denied, and the customer must provide another form of payment in order for the transaction to be successful.
If the funds are available in the customer’s account, however, the transaction continues with a stop through the merchant’s acquiring bank, where the transaction amount will be deposited, minus another 65 cents in fees.
Out of the $100 you sent to the merchant from your credit or debit card, the merchant will receive about $97.15, due to all the fees incurred along the way.
The process is only slightly different for transactions that occur face-to-face. Instead of relying on a payment gateway, the terminal where the card is swiped acts as the gateway for processing the payments.
This hopefully helps you understand how credit card processing works an a better level.
When Payments are Denied
Another important aspect of understanding how credit card processing works is the denial process. The credit card processing network is completely computerized, but as such, is programmed with certain “triggers” that will cause transactions to deny, even if there are enough funds available to process the transaction.
The most common triggers for payment denial, other than a lack of available funds are:
- Unusual spending habits: If a cardholder rarely uses their card, and then suddenly starts using the card multiple times per day, then this is going to send a signal to the system that someone other than the cardholder may have the card. It freezes spending on the card long enough for the issuing bank to get in touch with the cardholder to let them know what’s going on. In most cases, this stops fraudulent transactions from occurring, but also gives the cardholder a chance to say, “No, it’s me, I am doing this on purpose” so the bank can allow the transactions to take place.
- Purchases of products or services in the “high fraud” category: If you’re making purchases of products that fall into this category, the network will freeze the card to prevent fraudulent activity from taking place, just as if you were engaging in unusual spending habits.
- Purchases made outside of the cardholder’s country of residence: This is a good sign that a card has been lost or stolen. If you plan on traveling out of the country, it’s a good idea to call your issuing banks and let them know, so you’re not accidentally triggered.
And now you have a better understanding of how credit card processing works!