Introduction:

In today’s digital age, credit card transactions have become an integral part of our daily lives. Whether we’re shopping online or making in-store purchases, credit card processing enables us to complete transactions quickly and conveniently. But have you ever wondered about the intricate workings behind the scenes? In this blog post, we will take you on a journey through the credit card processing system and unravel the steps involved in turning your credit card swipe into a successful transaction.

 

The Key Players:

To understand the credit card processing system, let’s familiarize ourselves with the key players involved:

1. a) Cardholder: The individual making the purchase using their credit card.

 

1. b) Merchant: The business or service provider accepting the credit card as a form of payment.

 

1. c) Acquiring Bank: The financial institution that establishes and maintains the merchant’s account to accept credit card payments.

 

1. d) Issuing Bank: The bank or financial institution that issued the credit card to the cardholder.

 

1. e) Payment Processor: The intermediary that facilitates communication between the acquiring and issuing banks

 

Authorization Process:

When a cardholder swipes, inserts, or taps their credit card to make a purchase, the credit card processing system follows these steps to authorize the transaction:

1. a) Cardholder initiates the transaction: The cardholder provides their credit card details (card number, expiration date, CVV) to the merchant via a point-of-sale (POS) terminal, an online payment gateway, or a mobile payment app.

 

1. b) Merchant submits the transaction: The merchant securely transmits the card details, along with the transaction amount and additional data, to their payment processor.

 

1. c) The payment processor forwards the request: The payment processor relays the transaction details to the acquiring bank, which is responsible for the merchant’s account.

 

1. d) The acquiring bank forwards the request: The acquiring bank sends the authorization request to the issuing bank, seeking approval or denial of the transaction.

 

1. e) The issuing bank reviews the request: The issuing bank validates the transaction request based on factors such as available credit, potential fraud indicators, and cardholder information.

 

1. f) Authorization response: The issuing bank sends an authorization response back to the acquiring bank via the payment processor, indicating whether the transaction is approved or declined.

 

1. g) The merchant receives the response: The acquiring bank relays the authorization response to the merchant via the payment processor. If approved, the merchant proceeds with the sale. Otherwise, they inform the cardholder that the transaction was declined.

 

Settlement Process:

Once a transaction is authorized, the settlement process begins, ensuring that funds are transferred from the cardholder’s account to the merchant’s account.

1. a) Batch processing: Throughout the day, the merchant accumulates a batch of authorized transactions. At the end of the day, the merchant sends this batch to the acquiring bank via the payment processor.

 

1. b) Clearing the transactions: The acquiring bank forwards the batch to the payment processor, which separates the transactions based on the issuing banks involved.

 

1. c) Interchange fees and assessment: The payment processor deducts interchange fees (paid to the issuing bank) and assessment fees (paid to the card networks, such as Visa or Mastercard), from the transaction amount.

 

1. d) Funding the merchant: After deducting fees, the payment processor transfers the remaining funds to the merchant’s account, typically within a few business days.

 

Security and Fraud Prevention

Credit card processing involves sensitive data, making security and fraud prevention paramount. Here are some essential measures:

1. a) Encryption: Cardholder data is encrypted during transmission to prevent unauthorized access.

 

1. b) PCI DSS Compliance: Payment processors and merchants must adhere to Payment Card Industry Data Security Standards (PCI DSS), ensuring secure storage, handling, and transmission of cardholder data.

 

1. c) Address Verification Service (AVS): AVS compares the cardholder’s billing address with the address on file to detect potential fraud.

 

1. d) Card Verification Value (CVV): Merchants require the CVV code (the three- or four-digit number on the back of the card) to verify the card’s authenticity.

 

1. e) Fraud Detection Tools: Advanced algorithms analyze transaction patterns and behavior to identify suspicious activity and prevent fraudulent transactions.

 

Conclusion:

Credit card processing involves a complex network of players and processes working seamlessly to enable quick and secure transactions. From the moment a card is swiped to the settlement of funds, each step undergoes a meticulous authorization and verification process. By understanding the behind-the-scenes workings of credit card processing, we can appreciate the intricate systems that facilitate our everyday transactions and ensure the security of our financial information.