Estimated reading time: 3 minutes
How credit card processing works
Credit card processing occurs in stages, and each stage plays an integral role in ensuring that not only can customers pay for goods but that merchants are also paid.
Stage 1: Authorizing the Charge
Merchants must swipe the buyer’s card or use the chip reader. During this time, the information is transferred to the issuing bank and must be approved. The process entails:
- Swiping the card on your terminal
- Sending information to the acquiring processor or bank
- Credit network clears the information and requests the payment from the issuing bank
The enter transaction looks something like this:
- Cardholder > merchant
- Merchant > acquirer
- Acquirer > credit card network
- Credit card network > issuing bank
Now, this is just the first stage in a credit card transaction.
Stage 2: Authentication of the Card
The second stage is all about verifying the cardholder’s identity and ensuring that there’s no fraud occurring. You can think of the first stage as the network saying, “Yes, the card exists, there are funds in the account, and we can move to stage 2.”
Now, the following occurs:
- The credit network sends payment authorization to the issuing bank
- Issuing bank validates everything, from the CVV to the billing address and number
- Issuing bank approves or declines the transaction
- If approved, the issuing bank puts a hold on the person’s account for the requested purchase amount
- Merchants send a batch authorization at the end of the business day
- Customer receives the receipt of sale
During this time, the payment is not cleared, but there is a good understanding that the person requesting the charge is the cardholder and that the payment will go through.
Stage 3: Charge Clearing and Settlement
In the third and final stage of the credit processing process, the merchant is responsible for sending a batch of card authorizations to the acquiring processor or bank at the end of the business day.
The process involves:
- Processors sending the information to the credit card network
- Network forwarding all requests to the issuing banks for approval
- Funds being transferred from the issuing bank within 24 – 48 hours
- Acquiring bank credits your account
- Transaction is posted on the buyer’s account
During this process, additional fees are taken out, such as the interchange fee and any other fees associated with processing the credit card payment.
I’m currently with another provider. When do I close my account with them?
Ideally, once you have your gateway or terminal (for recommended terminals, see here) set up or have your new reader, you can begin closing out your account with another provider. You’ll want to begin the process by:
- Notifying the merchant that you plan on switching services
- Confirming who owns the equipment, such as your terminals
- Buying new equipment from your new processor if required
If you’re switching from another payment processor, we can help walk you through the entire process to ensure that there’s no interruption in your service during the transition.