“Calm on the surface but paddling like the dickens underneath!” is how Michael Caine described ducks in a pond. It’s also a good analogy for what happens when a customer swipes a credit card.
There are many key players in the process, and as a cardholder or customer it may not be crucial to have the inside story. But as a business owner, it’s smart to get a handle on the backstory. It can help you make better, more informed choices and to get the best partners and vendors. The world is rapidly going digital, a new generation of digital natives with no memory of a time when check payments or walking into a bank were the norm. As a result, customer expectations are getting higher and consumer behavior is becoming more fickle by the day. This means that it’s past time to embrace this ubiquitous technology. In short, credit cards and debit cards help businesses to get paid. Accepting credit card payments provides several important business benefits and it also helps sustain your company’s health and growth.
Who’s are the Players?
The main components of a credit card transaction include:
- Card Associations like Visa, MasterCard
- Issuing Bank (the bank that issued the credit card to the cardholder)
- Merchant Account
- Merchant Bank (the bank that holds the merchant account)
- Card payment processing company
- Independent sales organization
- Payment processing platform
- Payment gateway
Each one of these elements has to perform efficiently for a smooth, swift, frictionless transaction. Additionally, there is a highly complex process behind the entire operation.
How The Process Works
- The cardholder has possession of a credit card or debit card issued by an issuing bank under the aegis of a card association (e.g., MasterCard, Visa, Discover, etc.).
- The cardholder makes a purchase and presents their credit card at the POS (point of sale). It could be a physical presence or a CNP (card not present) transaction, such as an online, phone, or email transaction.
- The merchant (either the business owner or authorized staff) enters the transaction in the secure card terminal on their premises or operated on the go. Or for online transactions, the cardholder enters the information themselves online.
- The POS system or payment gateway transmits the information to processing network.
- The card issuer or issuing bank receives this information and can either decline or approve the transaction based on various criteria.
- The merchant and card processing company receive the approved or declined status.
- This information is also sent to the card association and merchant bank.
- If the transaction is approved, then the transaction is authorized.
- The goods or services can then be provided to the cardholder.
In general, it takes no more than a second for the transaction to go through at the POS (point of sale) at the sales end. Once this process has been understood, it’s important for business owners to be aware of the settlement and funding processes:
- The Merchant submits batches of transactions to payment processor.
- This is typically automated and based on an agreed-upon schedule, but it can also be done manually.
- The Payment processor shares this information with the appropriate card association.
- The card association communicates the debits with the issuing banks.
- Each issuing bank debits the cardholder account for the corresponding amount (although the money is not immediately collected from the cardholder).
- The issuing bank transfers the amount to merchant bank minus interchange fees.
- The Merchant bank transfers funds to merchant account