When you make a purchase with a credit card, the entire process, from swiping your card at the register to receiving a receipt – or inputting the card’s information to receiving a confirmation screen, if you’re making a purchase online – takes only a few seconds. In that short span of time, however, multiple electronic platforms are conducting a complex series of steps. These steps verify information, request authorizations, and move money between banks in an effort to complete a transaction. Below is an easy-to-follow explanation of what happens behind the scenes when you pay with plastic.
The cardholder is the customer wishing to make a transaction. The cardholder initiates the purchase process by swiping their credit card or handing it to the cashier (or inputting the credit card’s information if shopping online).
The merchant is the business selling its goods or services to the cardholder. The merchant is responsible for capturing the cardholder’s credit card information and beginning the authorization process via a Point of Sale (POS) terminal.
The Acquiring Bank
Also known as the acquirer, this is the merchant’s bank. As the name implies, it acquires the credit card information from the merchant and sends it to other parties involved in the process. Some merchants use third-party entities known as acquiring processors, which perform the same task – receiving an authorization request from the merchant and passing it along for approval – while forwarding the final decision to the acquiring bank.
The Credit Card Processing Network
Best known to people by the companies’ names, such as Visa or Mastercard, credit card networks are responsible for keeping the order between acquiring and issuing banks, as well as handling the fees that are collected in exchange for the service of completing a credit card transaction. These associations, which also include American Express and Discover, oversee the financial institutions that make up their networks.
The Issuing Bank
This is the cardholder’s bank, as well as the institution that issued their credit card. The credit card issuer is responsible for checking that the credit card in question can indeed be part of the requested transaction. This means checking for sufficient funds, verifying the legitimacy of the purchase, and either approving or declining the authorization request after said checks are completed.
Part One: From the Merchant to the Issuer, From the Issuer to the Merchant
- The merchant’s POS terminal captures the credit card’s information – account number, cardholder’s name, expiration date, and security code. It sends this information to the acquiring bank or acquiring processor.
- The acquirer receives the credit card information and sends an authorization request to the card processing network.
- The card processing network receives the authorization request along with the credit card information. After reviewing it, it sends the details to the issuing bank.
- The issuing bank receives the authorization request and verifies the credit card information. It checks that the credit card account has sufficient funds to complete the purchase, as well as the nature of the purchase itself to ensure that illegal or fraudulent activity is not taking place.
- After reviewing the information, the issuing bank either authorizes or declines the transaction request. If the transaction is declined, the issuer sends its decision in the form of a code that specifies the reason for the decline.
- If the issuer authorizes the transaction, it sends its response in reverse order: Back to the card processing network, back to the acquirer, and back to the merchant.
- After the issuing bank approves the transaction, it places a hold in the customer’s account for the amount of the purchase.
Part Two: Batch Processing, the Interchange, and the Bill
- At the end of each business day, the merchant’s POS terminal gathers the data of all credit card sales and sends it to the acquirer in a batch. The acquirer then goes to through each transaction and routes it to the appropriate processing network.
- The processing networks inspect all the transaction details and route them to the appropriate card issuing bank.
- The issuers will then debit each transaction amount from each cardholder’s account and transfer it to the processing networks. This will usually take place between a 24 to 48-hour period.
- As the issuing bank transfers the funds of all transactions, it subtracts processing fees known as interchange fees, which it shares with the processing networks. It is actually the processing network that sets and regulates these fees.
- The remaining funds are transferred to the acquirer, who also takes a cut of the interchange fee. In fact, almost every party involved in the payment processing of a credit card transaction will charge a small percentage for providing its services. So while it can be convenient, and expedient, for merchants to accept credit cards, it is not without its costs.
- After all of the fees have been subtracted, the final amount of money is deposited into the merchant’s bank account.
- Back on the customer’s end, the issuing bank will post the final details of the transaction, such as total amount and date processed.