How Credit Card Processing Works

How does credit card transaction processing work?

Credit card transaction processing varies depending on where a transaction takes place and what type of card is used. For example, an online credit card transaction will be initiated in a different way than an in-person card transaction. Similarly, an in-person transaction will work differently if the credit card is stored in a digital wallet compared to an in-person transaction where the customer uses a physical card.

But even with these smaller variations, the overall credit card transaction process is mostly consistent across different types of transactions. Here’s a simplified overview of how the process works:

1. Initiation

The cardholder provides their credit card information to the business. For in-person transactions, this means swiping, inserting, or tapping their card. For online transactions, this means entering the card details manually or selecting a card from their stored payment methods.

2. Data transmission

The business’s POS system or payment gateway captures the transaction details and securely transmits this information to the credit card processor.

3. Authorization request

The credit card processor forwards the transaction data to the appropriate card network, which then routes the authorization request to the issuing bank.

4. Approval or decline

The issuing bank verifies the cardholder’s account, checking for sufficient funds and any potential fraud or security issues. Based on this evaluation, the bank either approves or declines the transaction and communicates this decision to the card network, which relays the information to the credit card processor.

5. Authorization response

The credit card processor sends the authorization response—either an approval or a decline code—to the business’s POS system or payment gateway. If the transaction is approved, the business can complete the sale and provide the goods or services to the customer.

6. Settlement

At the end of the day, the business submits the batch of all approved transactions to the credit card processor for settlement. The processor also forwards the transaction details to the respective card networks.

7. Funds transfer

The card networks coordinate with the issuing banks to transfer the funds for each transaction to the acquiring bank, which receives the funds in the merchant account. The acquiring bank then transfers the funds into the business’s regular business bank account, minus any processing fees. This entire process usually takes 1–3 business days.

8. Cardholder billing

The issuing bank adds the transaction amount to the cardholder’s account balance and includes it in the monthly statement. The cardholder is responsible for paying the credit card bill according to the terms and conditions of their card agreement. Source