We live in a time where purchases are made to happen fast–we have instantaneous bank transfers, same-day delivery, and jet pack drones–so why can it feel like there’s a long pause at the cash register as we wait for a credit card to be accepted?
Every credit card transaction kicks off a long, complex chain of communication. While your cashier makes small talk with the customer, your credit card processor is hard at work behind the scenes tying each link of the chain–every entity involved in this financial transaction–seamlessly together.
Credit card processors provide the software, hardware, and transactional services necessary for a business owner to accept credit or debit cards as payment. If you own or manage a small business, hiring a credit card processing company is an important way to source additional revenue.
What is Credit Card Processing: An Overview
So, what actually happens when a customer tries to pay with a credit card? To start, we need to introduce you to the key players involved in every credit card transaction:
- Merchant: The business owner selling a product or service (i.e. you!).
- Customer: Anyone paying for a good or service at your business.
- Payment gateway: The technology used to collect a customer’s credit card information. It may be located in-store, such as a countertop card reader, or online, such as a checkout page.
- Credit card processor: A company that provides the hardware, software, and behind-the-scenes transactional services needed for a business to accept credit card payments.
- Card network: A customer’s credit card brand, typically one of the main four: American Express, Discover, Mastercard, and Visa.
- Issuing bank: The bank that provides a customer with their credit card.
- Acquiring bank: The merchant’s bank. This is whichever bank account you have linked to your business, whether it’s a business banking account or otherwise.
All of these entities work together so that when a customer uses their credit card to pay for a good or service at your business, money smoothly transfers from their account to yours. In a nutshell, there are three stages to credit card processing:
1. Authorization
In the authorization phase, a customer’s issuing bank communicates whether or not the customer has enough funds to complete the purchase. This stage is intended to protect the merchant from a devoid payment.
2. Authentication
In the authentication phase, the customer’s credit card network company asks the customer’s issuing bank to approve or deny the transaction. This step is intended to protect the customer from making an accidental purchase or being the victim of a fraudulent transaction.
3. Settlement
In the settlement phase, the credit card processor exchanges funds from the customer’s issuing bank’s line of credit to deposit into the merchant’s acquiring bank. This step encompasses the final payout.
Each phase works with the others to ensure that most transactions occur quickly and safely for everyone involved–but they also contain multiple steps and checks in themselves. To illustrate what happens within every stage of the credit card process, we’ll use an example of a customer (Joe) buying a cup of coffee from his favorite coffee shop, Olivia’s Cafe.
Part 1) Authorization: Protecting the Merchant
Authorization begins the moment Joe uses his credit card, tapping the card reader sitting atop the counter (i.e. the payment gateway). While he and Olivia chat about the morning, all of this happens:
- The payment gateway (in this example, an in-person card reader) sends a signal to Olivia’s payment processor, requesting a credited payment.
- The payment processor sends the request to the appropriate card network.
- The card network passes the request to Joe’s issuing bank.
- Joe’s issuing bank verifies he has enough available credit to complete the purchase. Simultaneously, Joe’s issuing bank runs any fraud-prevention checks to start making sure this is a legitimate purchase.
- Joe’s payment is approved, so this approval message is sent to the card network.
- The card network sends this approval to Olivia’s payment gateway.
- The payment gateway visually confirms for Olivia and Joe that the payment has been approved.
Now that Olivia knows Joe is good for the $2.50 charge, she pours his cup of black coffee and sends him on his way. Although the transaction appears to be over, there is still a lot happening behind the scenes in the next 24 hours.
Part 2) Authentication: Protecting the Customer
Even though Joe is already sipping his coffee by this point, his issuing bank has to put in some leg work to ensure the transaction is valid.
- The appropriate credit network requests payment authorization from Joe’s issuing bank.
- Joe’s issuing bank double-checks his card’s identifying information.
- Joe’s issuing bank sends its double-checked approval back to the card network and Olivia’s acquiring bank.
- Joe’s issuing bank places a hold on the funds he spent during the transaction (e.g. $2.50), which shows up on his credit statement as a pending transaction.
Part 3) Settlement: Paying Out
At the end of the business day, Olivia’s payment gateway will “batch” all of the approved payments, gathering them into one message that will be used to begin the Settlement stage.
- Olivia’s payment gateway sends the batched payments to her payment processor.
- The payment processor passes the batched payments to the card network.
- The card network sends the payment request to Joe’s issuing bank.
- Joe’s issuing bank charges his card the appropriate funds.
- Joe’s issuing bank skims off the agreed-upon fee amount from the transaction before sending the remaining revenue to Olivia’s acquiring bank.
- Olivia’s acquiring bank deposits the remaining funds into her business account.
The settlement stage can take 1–3 days to complete, depending on the amount in question, the day of the week, and any red flags that pop up during the process.
Prepare to Tap: Accepting Credit Cards at Your Business
From a humble tap of a card, to multiple banks, all the way to your business’s bank account: the credit card process is a feat of modern telecommunication.
If you’d like to accept credit cards at your business, but don’t know where to begin, try starting with our list of top-rated credit card processing companies. With a variety of services and features that can be tailored to your specific needs, credit card processors open up a new avenue to help your business grow and develop.
