Credit card processing seems easy. Your customer swipes his, or her card, and the transaction is done. Behind every swipe is a complex process. Sliding the card and signing the receipt is the first and final step of a complicated procedure. While the whole process happens in a few seconds, it involves multiple stages and there’s a lot of players behind the scenes.
If you’re a business owner, being insightful to the inner workings of credit card processing might help you understand how, and where, you might be overpaying. We believe it’s important for every single business owner to have an understanding of the credit card transaction process.
Before we enter the domain of credit card processing, you have to understand what’s involved. There are a few parties in every transaction!
The cardholder: this is the person whose purchasing from you, and whose going to use his credit card.
The merchant: this is you, the vendor selling the goods/services.
The bank: this is the party responsible for receiving the payment, and sending them to the issuing bank. It then relays the bank’s response to the merchant
The processor: this third party provides a service/device which allows the merchant to accept credit cards as well as send payment details to the credit card network. It then forwards the payment authorization back to the acquiring bank.
The issuing bank: this is the institution which issued the credit card in the transaction. It gets the payment authorization request from the credit card network, and then either approves or declines it.
The credit card transaction process
Credit card transactions are done through a variety of means, i.e. brick and mortar stores, e-commerce stores, wireless terminals and more. The entire process takes a few seconds.
Step 1: Authorization
In this step the merchant gets approval for payment from the issuing bank.
Step 2: Authentication
In this step the issuing bank verifies the credit card using fraud protection tools.
Step 3: Clearing
In this step the transaction is posted to the monthly credit card billing statement and the merchant’s statement.
Credit Card Processing Fees
If you’re a merchant, you really need to accept credit cards as payments. Depending on the type of merchant you are, and depending on which platform you are accepting a good/service from, the rates will vary. They are usually flat fees, per-transaction fees, or volume based fees.
Merchant Discount Rate: Merchants pay this fee for accepting credit card payments and getting service from acquiring processors. It’s between 2-3%.
Interchange fee: The acquiring bank and the acquiring processor pay this fee. It’s market based, and set by each credit card network individually. Most fees are assessed in two parts, a % to the issuing bank, and a fixed transaction fee to the network.