Last Updated on December 9, 2022 by Hammad Hassan
Credit cards have changed the way customers shop in stores and online. With plastic money replacing cash to a great extent, it has become imperative for businesses to accept card-based payments for their physical and online sales. Credit card payment online and offline goes through a detailed process. Understanding credit card processing can help a merchant use the payment mechanism better for his business.
As a merchant, when you study the credit card processing system, you will realise how simple and beneficial credit card payments are for a business. Merchants who accept credit card payments can increase their customer reach, increase their sales, and get benefitted from better security technology. Here is a detailed study of the parties involved in credit card payment processing and the steps for credit card processing for a merchant.
Which Parties are Involved in Credit Card Payment Processing?
The key players involved in the credit card processing system are:
- Cardholder: The individual who uses a credit card to make a purchase. He may or may not be the owner of the credit card.
- Acquiring bank: The financial institution that decides if a merchant can or cannot accept credit card payments by evaluating the risk of approving a merchant’s transactions. The merchant may or may not know who their acquiring bank is.
- Card associations: These are governing bodies that take care of the provision of credit card services to retailers and customers. They lay down the prerequisites for merchants to accept card-based transactions and the interchange fees for such transactions.
- Issuing bank: It approves the cardholder and customer and declines the payment transaction request.
- Merchant: The online platform selling goods or services; accepts credit card payments for the same.
- Merchant service provider: A department of acquiring bank or third-party responsible for the underwriting of a new merchant.
- Payment gateway: This software which enables the seller to accept card-based payments.
8 Steps For Credit Card Processing
Credit cards have become a popular mode of payment over the years. Almost everyone knows how to make a payment using a credit card. But what steps does the credit card payment go through to get processed and make the funds reach where they need to go?
Step 1: Making the payment:
Credit card processing starts with the customer selecting a product to make a purchase. He can make this purchase online at a shopping website, by mail, over the phone, or offline at a store. Credit card processing begins when a customer uses his credit card to make a payment.
Step 2: Entering the transaction:
If the customer is making the payment at a store physically, he has to swipe, dip, or tap the credit card on a secure credit card reader. Using a virtual terminal, he can manually enter the credit card and transaction information. When the customer makes an eCommerce transaction, he feeds in the payment details on a hosted payment form on the merchant’s website.
Step 3: Transmitting the data:
The credit card data gets encrypted and forwarded for approval to the point of sale (POS) system, terminal, or secure payment gateway. The POS system, terminal, or payment gateway is connected to the processing network. Protecting sensitive payment information for the entire credit card processing is crucial. Point-to-point encryption helps with this.
Step 4: Authorising the transaction:
The credit card issuer can approve or decline the transaction once the data is transmitted. The approval or denial of the transaction is based on the credit card’s validity, transaction amount, and the funds in the cardholder’s account.
Step 5: Responding to processor and merchant:
If the transaction gets rejected, the payment processing stops at this stage. The authorisation response gets forwarded to the processor and merchant if the transaction gets approved.
Step 6: Completing the transaction:
The payment transaction gets completed when the merchant gives a payment receipt to the customer and hands over the products. Suppose the customer has placed an online order, and the merchant packs and ships the product to the customer after this.
Step 7: Submitting a batch closure:
The credit card payment process is complete when the merchant does a batch closure. The batch closure closes all the transactions that customers perform on a particular day. After this, the processor’s acquiring bank collects money from the credit card issuers.
Step 8: Depositing the funds:
As a final step in the credit card processing system, the processor’s acquirer deposits the money from the transactions into the seller’s bank account. Depositing the funds may take up to two working days under ordinary circumstances.
Credit card payments make it easy for customers to pay for their purchases. It gives a boost to business and increases the profitability of the customer. Customers need to remember they have to pay credit card interest rates on overdue bill payments.