Every year, more than 23 billion credit card transactions are processed in the United States. Most people think nothing of it, but if you have ever wondered how it all works, especially with the efficacy by which it all happens, here are the steps.
Basically, there are four steps to processing a credit card:
- 1. Authorization
- 2. Batching
- 3. Clearing
- 4. Funding
While this may simple, each step contains its own set of complex characteristics that require specific and consistent communication between all of the separate entities involved:
- Consumer (or cardholder)
- Merchant (store, business, etc)
- Card Network
- Card Issuer
For the purposes of brevity and clarity, an “acquirer” is a bank that processes and settles the credit card transactions of a particular merchant. They act as the liaison between the merchant and the credit card issuer. Furthermore, a credit card issuer is a bank that has access to credit card networks (Visa, Mastercard, etc).
The authorization step is really the only step in which the consumer has any active participation. This step is, basically, the entire process of purchasing and receiving goods or services. First, the cardholder (consumer) uses the card to “request” a purchase from a merchant. This purchase could be either goods received or services rendered:
- Personal Apparel
- An oil change/transmission flush, etc
- A massage/manicure/haircut, etc
Of course, these are all things that you can buy in person, but you can also use your card to make online purchases. This is the same basic process with the only difference being, really, that you do not actually deal with a physical person at the merchant stage. Instead you will interact with the virtual store and conduct your transaction electronically through an online point of sale or other method like Paypal (which still involves the processing of funds through your credit or debit card).
Secondly, the merchant rings up the product and you hand over your card (or information in an online transaction), at which time the merchant scans/swipes/runs your card information to acquire an authorization from the issuing bank or institution.
The bank will approve the account for the appropriate dollar amount and send that information back to the store who then finalizes the transaction by accepting your payment and handing you the merchandise you purchased. This also the stage in which a “decline” may occur, at which point the consume is instructed of the information and of options for alternative payment methods.
Batching is the next step in the credit card transactions process. This step involves the collective transmission of an entire day’s worth of transactions between consumers and the merchant who, at the end of the day, request one large payment from the credit card network bank for payment of the entire day’s transactions. Requesting of funds and processing is done in this way because it is much more efficient than requesting the money for every single purchase processed over the course of a single business day.
At this step, the merchant is absent from the process because this is the part of the process in which the banking network obtains payment from the credit card issuer via credit card network. The acquiring firm sends a request to the card network which then sends a request to the card issuer. The card issuer subtracts their interchange fee from the transaction and sends the money to the card network, who then routes the appropriate dollar amount back to the acquisition firm. Basically, the process starts working in reverse at this point.
Here, the acquirer takes the adjusted sale amount and delivers it, electronically, back to the merchant who requested it after subtracting their discount fee. In the end, then, you see that the price the consumer pays is the full cost of the transaction, which includes not only the price of the item or service purchased but also the credit card issuer’s interchange fee as well as the network acquirer’s discount fee.
Credit card processing is actually a complex process of communications between several entities but it can be described in four simple steps. Fortunately consumers avoid the headache as they are only involved during the first step and most of the work is done after they leave the store.