How Credit Card Processing Works:
Step By Step
Credit Card Processing can be reduced to one of six steps. For the most part, each of these steps is involved with transferring a cardholder’s payment information and authorization from one party to another. The primary job of the credit card processing cycle is to determine whether a purchase has the necessary funds to be completed. Transactions with an EMV chip credit card take on average 15 seconds to complete.
The first step in credit card processing happens on the consumer level, when a cardholder swipes, dips their card, or hands over their payment information to the merchant.
Next, the merchant accepts and collects the payment information. This can be done in one of two ways. The payment can be accepted physically in so-called card present transactions. This usually happens at a storefront, with some a credit card reader. Similarly, The merchant step can also happen online for card not present transactions. Instead of a card reader, merchants use an online gateway to collect the payment from their customer.
The credit card processor collects that information and is responsible for routing that data across to the other stages, and facilitating communications between various parties. Initially, however, their primary role is to send the payment information to the card network.
4. Card Networks:
Your customer’s card will operate one of the major credit card networks — the most common ones are Visa and MasterCard. Once the networks receive the payment information from the processor, they pass it to your customer’s bank.
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5. Consumer Bank:
The cardholder’s bank then receives the payment request, and they verify whether the cardholder has the appropriate funds or credit to complete the purchase. The bank may also run through additional security measures to verify whether they purchase is legitimate, and not fraudulent. Once they establish that the customer has the funds needed and that the purchase is not fraudulent, they send a message back through the networks and through the credit card processor, allowing the transaction to go through. Common reasons why the cardholder bank decline a transaction include: insufficient funds in the account, a credit limit has been reached, or the bank suspects the purchase is being made by a non-authorized user.
6. Back To The Merchant:
The message that the payment has been requested or denied flows back through the same channels it did to get to the cardholder’s bank. When the transaction is handled in-person, this usually corresponds with a message on the card reader like “Approved” or “Declined”. Assuming a transaction is cleared, the merchant is expected to provide the customer with whatever goods or services were promised in return for the payment.
It’s important to note that at this point no funds are released yet, meaning the transaction is not completely settled. That is a separate process that can take up to several days to complete, depending on the card networks involved. Generally speaking, Visa and MasterCard transactions tend to settle faster than American Express. The process of settling a transaction and releasing the funds from the cardholder bank to the merchant bank involves the same players described above, with the flow of communication being very similar.