Credit cards are an important part of your business. You'll need to find a company that will help you accept them as payment, so it is vital to research the companies available and make sure they're compatible with what you want for your future success.
To understand how a credit card processing company works, we need to look at the actors and their roles.
Who are the actors in credit and debit card transactions?
- Cardholder: A cardholder obtains a debit or credit card from an issuing bank and uses the account to purchase goods and services.
- Merchant: A merchant is a business that accepts card payments in exchange for goods or services.
- Merchant Bank: Merchant banks allow businesses to accept payments from credit and debit cards.
- Payment Processors: Payment processors are essential to the world of online shopping. They connect merchants, merchant banks, and card networks in order for card payments to be possible. This is an important service that we take for granted now, but life would just not be as simple without it!
- Issuing banks: The issuing banks are the financial institutions that issue debit and credit cards to cardholders through various organizations.
- Card Associations: Card associations include Mastercard, Visa, Discover, and American Express. These groups set interchange rates and qualification guidelines for their memberships and arbitrate between acquiring banks and issuing banks.
Basically, credit card processing works in 3 individual processes:
- The cardholder gives their card to the merchant in exchange for services or goods. The request originates from a credit card terminal, point of sale system, eCommerce website gateway, and/or mobile device.
- The merchant sends a request for payment authorization to their payment processor.
- The payment processor then submits transactions to the right card association, eventually reaching the issuing bank.
- Many of the parameters are handed over to banks such as CVV and AVS when making an authorization request.
- The bank approves or declines the transaction. The transactions can be declined for insufficient funds, available credit, closed account, and expired cardholder’s account.
- After verification, the issuing bank approves or denies a transaction and sends that information back along the line to other banks.
Settlement and Funding
- Merchants send the transactions to their respective payment processors.
- The payment processor passes the details of the transaction to the card associations that communicate with your bank.
- The issuing bank charges the cardholder for the amount of the transactions.
- The issuing bank then transfers the funds necessary for transactions to be processed minus transaction fees.
- The merchant bank then deposits funds into the merchant account.
If you want to know more about credit card processing fees, check out Processing Card’s article on how much credit card processing fees are.
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