How a Credit Card Purchase Works

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Last updated on March 22nd, 2023

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. Here is a comprehensive guide to how the credit card purchase process works.

Who’s Involved in the Process?

Before discussing the credit card purchase process, it is essential to first identify the key players involved:

① Cardholder 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).
② Merchant 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.
③ 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.
④ Credit card processor 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.
⑤ 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.

How the Credit Card Payment Process Operates

The credit card purchase process is composed of three distinct steps: acquisition, authorization, and clearing (or settlement).  Here’s a quick breakdown of those steps and how the credit card purchase process works:

① Authorization Credit card network clears the payment and requests payment authorization from the issuing bank.
Issuing bank sends approval code if transaction was successful.
Merchant provides a receipt to customer.
② Authentication Merchant collects all credit card transactions as a batch.
Merchant sends the batch to acquiring bank.
Acquiring bank forwards batch to the credit card network
③ Clearing Credit card network routes each transaction to issuing banks.
Credit card network pays the acquiring bank
Acquiring bank pays the merchant the purchase price, minus a “merchant discount rate.”
Issuing bank posts the transaction to the cardholder’s account.

The Steps

As noted, the credit card purchase process can be broken down into several steps. Here is a more detailed look at each step in the process:

  1. Cardholder makes a purchase. The credit card purchase process begins when the cardholder makes a purchase. The cardholder gives their credit card to the merchant, who initiates the transaction process.
  2. Merchant processes the transaction. The merchant uses a payment terminal or an online payment gateway to process the transaction. The payment gateway sends the transaction details to the merchant’s acquiring bank for authorization.
  3. Acquiring bank authorizes the transaction. The acquiring bank checks the cardholder’s account to make sure they have enough available credit to complete the transaction. If enough credit is available, the bank authorizes the transaction and sends an approval message to the payment network.
  4. The payment gateway sends transaction details to the issuing bank. The payment gateway sends the transaction details to the cardholder’s issuing bank for confirmation. The issuing bank will verify the cardholder’s account information and check for fraud or suspicious activity.
  5. Issuing bank approves or declines the transaction. If the issuing bank approves the transaction, it sends an approval message to the payment gateway. If the bank declines the transaction, it sends a decline message to the payment gateway, and the transaction will be rejected.
  6. The payment gateway sends an approval or decline message to the merchant. The payment gateway will send the approval or decline message to the merchant. If the transaction is approved, the merchant will complete the sale, and the cardholder will receive their purchase. If the transaction is declined, the merchant cancels the sale, and the cardholder will not receive their purchase.
  7. Issuing bank sends the bill to the cardholder. The issuing bank adds the transaction amount to the cardholder’s account balance and sends a credit card statement to the cardholder at the end of the billing cycle.
  8. Cardholder pays the credit card statement. The cardholder pays the bill in full or in installments, depending on the card’s terms and conditions. If the cardholder does not pay the bill in full, interest charges are added to the balance.

Summing It Up

The credit card purchase process is a complex-but-important part of our daily lives. Understanding the steps involved in the process and taking steps to protect oneself can help you ensure a smooth and secure transaction experience.

Related Article: Credit Card Purchase Protection: Everything You Need to Know

About: Cory
Cory Santos

Cory is BestCards.com's "Jack of all trades" and resident credit expert, covering all facets of the credit card space. Cory holds academic degrees in both the U.S. and U.K. In addition to credit cards, Cory finds that jogging, cats, and memes are essential parts of a balanced day.

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