Understanding Credit Card Processing

April 22, 2024 Off By Danny Walton

In today’s digital age, credit cards have become a ubiquitous part of our daily lives. Whether it’s purchasing groceries, paying bills, or shopping online, credit cards offer convenience and flexibility. Behind every successful credit card transaction lies a complex system known as credit card processing. In this comprehensive guide, we will delve into what credit card processing is, how it works, and its importance in the modern economy.

Table of Contents

What is Credit Card Processing?

At its core, credit card processing is the behind-the-scenes operation that occurs when a customer makes a purchase using a credit card. It involves a series of steps that authorize, transfer, and settle payment transactions. These steps are facilitated by various parties, including the cardholder, the merchant, the acquiring bank, the issuing bank, and payment processors.

Credit Card Processing System Components

Cardholder Initiates Transaction – The process begins when a customer presents their credit card to make a purchase. The card contains essential information, such as the cardholder’s name, card number, expiration date, and CVV (Card Verification Value) code.
Merchant Submits Transaction – Once the cardholder initiates the transaction, the merchant, whether a physical store or an online retailer, sends the transaction information to their payment processor. This data includes the credit card number, the transaction amount, and the merchant’s identification number.
Payment Processor Routes the Transaction – The payment processor, also known as the acquiring bank or acquirer, then forwards the transaction information to the appropriate credit card network. The most common credit card networks include Visa, Mastercard, American Express, and Discover.
Issuing Bank Authorizes Transaction – The credit card network sends the transaction details to the cardholder’s issuing bank. The issuing bank is responsible for approving or declining the transaction based on the cardholder’s available credit, account status, and potential fraud alerts.
Transaction Settlement – Once the transaction is authorized, the acquiring bank submits the approved transaction to the credit card network for settlement. The settlement process involves the transfer of funds from the issuing bank to the acquiring bank.