HOW CREDIT CARD PROCESSING WORKS

Credit card processing is one of the integral aspects of merchant accounting, and as a businessman, it is essential for you to know all details about how the entire process works.  

Working of credit card processing:

A customer who uses a credit card to make payments provides their details, which is noted by the card reader, the virtual terminal or even via a manual entry, after which it is verified and authorized so that the merchant will receive his payment. Therefore, the parties who are a part of this process are –

·         The cardholder – who is the owner of the card used to make payments

·         The merchant – referring to the business which accepts the card payments in exchange for their services or products sold

·         The acquirer – which is a financial agency that gives the merchant the card processing service

·         The card association – the card network that interacts in between the acquirer and issues, like VISA or MasterCard

·         The issuer – the organisation that gave the credit card to the initial cardholder

Now that we know who are all the people involved in the credit card processing system, the next step will be to understand how the system itself works. This is explained using 4 simple steps – authorization, batching, clearing and settlement and funding. They are discussed in detail as follows:

·         Authorization: the first thing that is done is the cardholder gives his card to pay for his purchase, after which the merchant will give the transaction over to the acquirer. At the same moment that the acquirer receives it, it gets verified by the issuer, confirming the cards validity on the number as well as the transaction to be processed. The acquirer then puts the cardholder’s transaction through.

·         Batching: once the authorization part is done with, the valid transaction is stocked up in a batch, which is sent generally at the end of the working hours to the acquirer by the merchant in order for the payment to be made.

·         Settlement and clearing: this step involves the acquirer sending the stocked up batch, which contains the transaction, to the card association. They in turn make two actions, debiting the issuer with the payment, and crediting the acquirer. Hence, the actual transaction that took place was between the issuer and the acquirers.

·         Funding: now that the settlement has been made and the acquirer has received payment, the merchant will finally receive payment. This sum consists of the transaction amount, less the discounted rates, which in turn is the sum paid by the merchant to the acquirer for the processing of his transaction.

This then is the entire credit card processing that takes place between the various parties, and it takes normally around 3 days from authorization to the funding step. If in case a chargeback occurs in the transaction, meaning that the cardholder disputes the payment or an error occurs in the transaction, the issuer has to return the amount to the acquirer, who after consideration will forward the chargeback to the merchant. The merchant then has the right to accept the chargeback or if he is still not satisfied he can contest it again.

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