Card Processing Basics

How card processing works

When a customer pays for products or services with a credit card, the card information is recorded — either by manual entry, a card imprinter, point-of-sale (POS) terminal, or virtual terminal — and then verified so that the merchant can receive payment for the transaction. This process involves the following parties:

  1. CARDHOLDER: the owner of the card used to make a purchase
  2. MERCHANT: the business accepting credit card payments for products or services sold to the cardholder
  3. ACQUIRER: the financial institution or other organization that provides card processing services to the merchant
  4. CARD ASSOCIATION: a network such as VISA®, MasterCard®, Discover® (and others) that acts as a gateway between the acquirer and issuer for authorizing and funding transactions
  5. ISSUER: the financial institution or other organization that issued the credit card to the cardholder

Flow Diagram

The flow of information and money between these parties, always through the card associations, is known as the ‘Interchange’, and it consists of a few steps:

  1. AUTHORIZATION: The cardholder pays for the purchase and the merchant submits the transaction to the acquirer. The acquirer verifies with the issuer, almost instantly, that the card number and transaction amount are both valid, and then processes the transaction for the cardholder.
  2. BATCHING: After the transaction is submitted it is then stored in a batch, which the merchant sends to the acquirer later to receive payment (usually at the end of the day).
  3. CLEARING THE SETTLEMENT: The acquirer sends the transactions in the batch through the card association, which debits the issuers for payment and credits the acquirer. In effect, the issuers pay the acquirer for the transactions.
  4. FUNDING: Once the acquirer has been paid, the merchant receives payment. The amount the merchant receives is equal to the transaction amount minus the discount rates, which is the fee the merchant pays the acquirer for processing the transaction.

The entire process, from authorization to funding, usually takes about 3 days. In the event of a CHARGEBACK (when there’s an error in processing the transaction or the cardholder disputes the transaction), the issuer returns the transaction to the acquirer for resolution. The acquirer then forwards the chargeback to the merchant, who must either accept the chargeback or contest it.

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