How card processing works
When a customer pays for products or services with a credit card, the card information
is recorded — either by manual entry, a card imprinter, point-of-sale (POS) terminal,
or virtual terminal—and then verified so that the merchant can receive payment for
the transaction.
This process involves the following parties:
Cardholder: the owner of the card used to make a purchase
Merchant: the business accepting credit card payments for products
or services sold to the cardholder
Acquirer: the financial institution or other organization that
provides card processing services to the merchant
Card association: a network such as VISA or MasterCard (and others)
that acts as a gateway between the acquirer and issuer for authorizing and funding
transactions
Issuer: the financial institution or other organization that issued
the credit card to the cardholder
The flow of information and money between these parties — always through the card
associations — is known as the interchange, and it consists of a few steps:
1. Authorization
The cardholder pays for the purchase and the merchant submits the transaction to
the acquirer. The acquirer verifies with the issuer — almost instantly — that
the card number and transaction amount are both valid, and then processes the transaction
for the cardholder.
2. Batching
After the transaction is authorized it is then stored in a batch, which the merchant
sends to the acquirer later to receive payment (usually at the end of the day).
3. Clearing and settlement
The acquirer sends the transactions in the batch through the card association, which
debits the issuers for payment and credits the acquirer. In effect, the issuers
pay the acquirer for the transactions.
4. Funding
Once the acquirer has been paid, the merchant receives payment. The amount
the merchant receives is equal to the transaction amount minus the discount rate,
which is the fee the merchant pays the acquirer for processing the transaction.
The entire process, from authorization to funding, usually takes about 3 days.
However, Merchant Card Processing from some banks and financial institutions can
offer next-day deposits to their customers with a business checking account.
In the event of a chargeback (when there's an error in processing the transaction
or the cardholder disputes the transaction), the issuer returns the transaction
to the acquirer for resolution. The acquirer then forwards the chargeback
to the merchant, who must either accept the chargeback or contest it.
How card processing benefits your business
Regardless of your business's size or industry, there are many benefits in having
the ability to process credit card transactions.
By accepting multiple forms of payment, you give your customers options and improve
their experiences. You also introduce a new audience of customers to grow
your business organically.
In addition, card processing is an efficient, convenient payment solution that helps
you improve cash flow by ensuring timely, automatic deposits to your account.
Value-added services — like gift card and prepaid card programs — can provide a
new channel for generating profits and increasing your revenue.