Credit card payment processing is actually a very intriguing process. You may be surprised at how many steps are involved in this process in such a short amount of time.
The Steps of Credit Card Payment Processing
When a shopper presents a credit card to a merchant to pay for a purchase, the resulting actions seem simple; the merchant swipes the card, the shopper signs for the purchase, and the transaction is complete. What shoppers may not realize is that the simple act of swiping the card results in an electronic frenzy of data exchanges to ensure the credit card number is valid and the funds are available for the purchase.
Have you ever wondered what actually happens when your credit card is swiped for a purchase? Below is the step-by-step process in a simplified summary.
When your credit card is swiped by a merchant for a purchase, the first trip the data takes is to make sure the purchase is actually authorized. The merchant sends an electronic request to the credit card processing service, which then in turn sends a request for authorization to the credit card issuer.
The credit card processing service requests the information on behalf of the merchant and acts as a liaison between the two. The processing service charges a fee for this service; sometimes it is a flat fee, sometimes it is a portion of the transaction amount, and sometimes it is both.
The authorization is not sufficient for the merchant to receive the actual payment from the credit card transaction. In most instances, merchants lump many credit card transactions together -sometimes a full day's worth of credit card transactions- and then send the entire grouping to the financial institution that acts as a further liaison between the merchant and the credit card companies.
This step is required before the merchant can actually receive the payments from the credit card transactions.
The financial institution that receives the grouping of credit card transactions from the merchant then forwards this information to the appropriate credit card company, whether it is Visa, MasterCard, or some other credit card company. When the information is received by the credit card company, the company then further disseminates this information to each particular credit card issuer.
Examples of credit card issuers include Capital One or Bank of America.
Credit card issuers receive the transaction information and subtract any necessary fees from the amount of money they eventually authorize the credit card company to send back to the financial institution acting on behalf of the merchant.
Because of these fees, merchants do not receive the full amount of the transaction when they allow customers to pay using credit cards.
Merchants receive payment directly from the financial institution they use as their intermediary. The financial institution requires a fee for the service. When the other fees involved in credit card payment processing are all taken into consideration, merchants can expect to pay quite a few fees for the privilege of accepting credit cards for payment from customers.
These fees are not so prohibitive, however, since most customers are willing to spend more freely when they are allowed to pay for their purchases using a credit card as opposed to paying with cash or with a check.
Errors in Processing
While the process of transmitting purchase information is relatively seamless, and occurs many times throughout an average day, it is possible to see how it may be possible for errors to occasionally occur during the data transfer.
Luckily, with so many different agencies involved in the credit card transaction process, errors are oftentimes corrected quickly. Even though the process is rapid and electronic, customers should always hold on to receipts for purchases at least until the correct amount has been charged to their credit card accounts.