Understanding How Credit Card Payment Processing Systems Work

A credit card is so convenient to use.  Yet, the back-end process is very complex involving a lot of steps and players. For a basic understanding of how credit card processing systems work; the cardholder passes information to the credit card network, the merchant processing company and finally to the cardholder’s bank. The bank will either approve or reject the transaction; the basis of whether the merchant releases the goods to you or not.

Whether you are transacting on Shopify in USA, Australia, United Kingdom or India,   the basic process is the same.  We will look at the steps in more detail below.

The processing systems of credit card payment

We can summarize the actual steps of processing your credit card payment in six steps. The steps include the transfer of information from the credit card holder to the authorizing bank. The process determines whether the person who is making the purchase has sufficient funds in his or her account to cover the cost of the purchase.

As technical or complex as the process sounds, some transactions will only take about 15 seconds to complete.  The approval process for credit cards with EMV chips is very fast.

The Consumer

The consumer is the cardholder. He or she will swipe the credit card to make a purchase.

The Seller or Merchant

Once the consumer swipes the card, the Merchant accepts and does the collection of the payment information. You can collect the data physically using the credit card reader, where there is an actual card present during the transaction like when a customer is shopping in a store or supermarket.  

Other times these transactions occur online, for example, if the consumer was transacting on Shopify.  In this case, there is no card reader, but the merchant will use the online gateway to accept payment from the customer.

The Processor

The processor collects the card information and sends the data to the other parties. It does this by facilitating communication on the card network.

The Card Networks

The card networks include MasterCard and Visa. Once the payment information reaches these networks, they pass it on to the cardholder’s bank.

The Cardholder's Bank

The cardholder’s bank will receive the payment request from the card networks and verify whether there are sufficient funds in the account. It will also run verification measures for additional security purposes; this will confirm whether the purchaser is a legitimate customer and not a fraud.

Once the cardholder’s bank establishes the availability of funds, they send back the information. The information goes through the card networks and the card processor, to the merchant thus allowing for the transaction to go through.

The cardholder’s bank may decline if the funds are not sufficient, if it is over the credit limit, or if they believe that the person making the transaction is not an authorized user.

Back to the Seller

The information flows back to the seller through the same channels. The information will be the go-ahead or decline message. If the seller gets a Go-Ahead message, he should then release the goods to the customer on a promise that he will get the payment. At this point, there is no release of money, and that is why it is a promise from the cardholder’s bank that he will get his or her money eventually.

The payment processing system can take several days depending on the card networks. American Express is slower than MasterCard and Visa.

Which parties are involved in the processing of credit cards?

There are four key players in processing of credit cards; these are the Merchant or acquiring bank, the credit card processor, the card networks or card associations and the consumer or issuing bank. We will explore their roles in detail below.

The Acquiring or Merchant Bank

The Merchant Bank is where the seller holds his money. Sometimes it has the dual role of being the processor, although there are third-party non-bank processors like PayPal and square.

The Merchant Bank will give business owner equipment that accepts cards like card readers. They will deposit money into the seller’s account once the sale goes through. An example of an acquiring bank is Chase and Wells Fargo.

Credit Card Processor

A credit card processor is that link between the Merchant and the cardholder’s bank. They acquire payment information and ensure that it complies with the Payment Card Industry Data Security Standard (PCI DSS).

Credit card processors make their money by collecting a fee from the sellers which can be a percentage mark-up on the Interchange fees or a fixed amount. Examples of credit card processors are stripe, Square and Authorize.net.

Card Network or Card Associations

Card networks work with card processors to relay data between the seller and the issuing bank. They also set interchange and assessment fees but do not collect the money. The issuing bank gets the Interchange fees. Examples of card networks are American Express, Discover, MasterCard, and Visa.

Customer or Issuing Bank

The customer bank is the one that issues the credit card to the buyer.  It is the same bank which will determine whether or not a transaction goes through because they will be the final word on whether there are sufficient funds in the account.

Final Thoughts

Technology has simplified so many processes for the final consumer, every time you take out your credit card and swipe it, there is a lot of processing that goes on in the background that you are not aware of. In less than a minute, you can purchase something of great value without physical cash.

The best part about it is that there are players in the background, who make it possible for you to achieve this without having to go into the nitty-gritty of it. However, it doesn’t hurt to know why you sometimes get the decline transaction message from your bank. When something goes wrong, having the right information will help you understand who to follow up with so that you can get a resolution as quickly as possible.


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