Question

Payment transaction processing with card

Answer 1

On the surface, the credit card transaction process seems simple: Customers swipe their cards, and before they know it, the transaction is complete. Behind every swipe, however, is a profoundly more complex procedure than what meets the eye. In fact, sliding the card and signing the receipt are only the first and final steps of a complicated procedure. And the whole process — though it happens in merely a few seconds — involves multiple stages and several actors working behind the scenes.

Although being familiar with the credit card transaction process may not seem useful to the average consumer, it provides valuable insight into the inner-workings of modern commerce as well as the prices we ultimately pay at the register. What’s more, knowledge of the credit card transaction process is extremely important for small business owners since payment processing represents one of the biggest costs that merchants must confront. Below, we provide a cross-sectional perspective of the process that takes place with every swipe — from the participants to getting approved or declined.

1 CREDIT CARD TRANSACTION PARTICIPANTS
2 CREDIT CARD TRANSACTION PROCESS
3 CREDIT CARD PROCESSING FEES & COSTS
4 WHEN A CREDIT CARD GETS DECLINED

Credit Card Transaction Participants
Before you can understand the process of a credit card transaction, it’s best first to familiarize yourself with the key players involved:

Cardholder: While this is pretty self-explanatory, there are two types of cardholders: a “transactor” who repays the credit card balance in full and a “revolver” who repays only a portion of the balance while the rest accrues interest.
Merchant: This is the store or vendor who sells goods or services to the cardholder. The merchant accepts credit card payments. It also sends card information to and requests payment authorization from the cardholder’s issuing bank.
Acquiring Bank/Merchant’s Bank: The acquiring bank is responsible for receiving payment authorization requests from the merchant and sending them to the issuing bank through the appropriate channels. It then relays the issuing bank’s response to the merchant.
Acquiring Processor/Service Provider: This third-party entity is sometimes an arm of the acquiring bank. A processor provides a service or device that allows merchants to accept credit cards as well as send credit card payment details to the credit card network. It then forwards the payment authorization back to the acquiring bank.
Credit Card Network/Association Member: These entities operate the networks that process credit card payments worldwide and govern interchange fees. Examples of credit card networks are Visa, MasterCard, Discover and American Express. In the transaction process, an credit card network receives the credit card payment details from the acquiring processor. It forwards the payment authorization request to the issuing bank and sends the issuing bank’s response to the acquiring processor.
Issuing Bank/Credit Card Issuer: This is the financial institution that issued the credit card involved in the transaction. It receives the payment authorization request from the credit card network and either approves or declines the transaction.

Credit Card Transaction Process
Credit card transactions are processed through a variety of platforms, including brick-and-mortar stores, e-commerce stores, wireless terminals, and phone or mobile devices. The entire cycle — from the time you slide your card through the card reader until a receipt is produced — takes place within two to three seconds. Using a brick-and-mortar store purchase as a model, we’ve broken down the transaction process into three stages (the “clearing” and “settlement” stages take place simultaneously):

Stage 1: Authorization

In the authorization stage, the merchant must obtain approval for payment from the issuing bank.

The cardholder presents their credit card for payment to the merchant at the point of sale.
After swiping their credit card on a point of sale (POS) terminal, the customer’s credit card details are sent to the acquiring bank (or its acquiring processor) via an Internet connection or a phone line.
The acquiring bank or processor forwards the credit card details to the credit card network.
The credit card network clears the payment and requests payment authorization from the issuing bank. The authorization request includes the following:
Credit card number
Card expiration date
Billing address — for Address Verification System (AVS) validation
Card security code — CVV, for instance
Payment amount