How Does Credit Card Processing Work?

Shopping with your credit card is easy. You just swipe, dip, or tap your card at the register, or enter your card info online, and typically complete your purchase within seconds. But do you understand what’s happening behind the scenes?

Credit card processing is quick, but it’s a complicated system with a lot of moving parts. Understanding the basics may give you an idea of what happens in the moments after you use your card.

Key terms in credit card processing

Many parties and tools go into processing a single credit card payment. The first step to breaking down the process is defining exactly who and what are involved in each transaction, according to the University of California (UC), Santa Barbara. There may be some overlap between the functions of each tool.

• Credit card issuer or issuing bank. The credit card company or bank that issued your credit card is responsible for assessing and authorizing your card transaction, sending money to the merchant bank, and billing you.
• Credit cardmember. The credit cardmember is the person who holds the credit card account and makes the purchase.
• Merchant. The merchant is the business that accepts a credit card or debit card payment in person, online, or over the phone in exchange for a good or service. A merchant might be a store, an online marketplace, a freelancer, or an individual, like someone selling baked goods at a market.
• Merchant or acquiring bank. A merchant bank or acquiring bank is a financial institution that holds the merchant account where funds from credit card transactions go.
• Point-of-sale (POS) system. A POS system may refer to the physical hardware that allows a merchant to take credit card payments and the software to process the transaction.
• Payment gateway. A payment gateway is the system that carries the payment information from the POS terminal to the merchant bank. The payment gateway encrypts credit card data in compliance with official Payment Card Industry (PCI) security guidelines.
• Payment processor or merchant services company. A payment processor manages merchants' credit and debit card transactions. Payment processors may sometimes do the work of payment gateways and acquiring banks, but not always.
• Credit card network. A credit card network, like Discover®, establishes the rules and systems for processing credit card transactions. Credit card networks act as a bridge between the issuing bank and the acquiring bank. They may charge credit card processing fees.

Processing a credit card transaction

When you use your credit card to buy a smoothie, you only have to wait a few seconds before your drink is in your hand. But a lot happens between your card issuer, the merchant bank, and the credit card network to make that transaction happen in that time.

Every time you use your credit card, you initiate a complex payment processing procedure that ensures the merchant receives funds if the transaction is approved. Then the credit card issuer may increase your balance and apply credit card rewards.

The transaction process begins when you present your credit card as payment at the register or online.

The merchant’s POS device reads your credit card data and sends the payment information to the payment processor or the acquiring bank. Remember, sometimes the acquiring bank and payment processor are the same, but sometimes they’re separate entities. The acquiring bank or payment processor transmits the data to your credit card issuer.

When the card issuer receives the relevant information, it confirms your identity and account status. Then, the card network checks your available credit. If you have enough available credit to afford the transaction, the network authorizes it.

If you’ve reached or exceeded your credit card limit, your transaction may be declined. The card issuer might also decline your transaction for suspicion of fraud.

The card network passes the decision about the transaction back to the acquiring bank or payment processor, then finally back to the merchant’s EMV POS device. Your credit card data passes between several different entities every time you use your card. But UC Santa Barbara explains that all parties use encryption and take other security measures to protect your credit card data and maintain PCI compliance.

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