How Credit Card Processing Works?

To best understand credit card processing you need to know how credit card transactions work. Whenever a customer buys something, the retailer swipes the customer's card through either a machine or handheld device, enters the purchase amount, and then either imprints or manually keys in an account number into that machine. That information is sent to the merchant's bank, sometimes called the acquirer, which verifies that the customer's account has enough funds to cover the purchase and approves or declines the transaction.

The acquirer then forwards the authorization request to the card issuer, which is usually a bank. If everything is okay, the issuer sends an approval code back to the acquirer, and the merchant's bank will then credit the acquirer for the amount of the sale.

When the customer swipes their card through a machine, merchants know immediately whether or not they will receive payment. If not, they can cancel the transaction before running it through again while holding onto that customer's card. The reason this doesn't happen often is because offline authorization makes it easier for merchants to install and use equipment.

It also helps them reduce the likelihood of fraud. The issuer, acquirer and merchant can all decline transactions before they go through if any one of these parties suspects the transaction is fraudulent. But this type of security doesn't exist when a customer pays with plastic online or by phone.

That's why it can seem inconvenient to shop online. The only security the merchant has is the guarantee they'll receive payment from their customer by mail or a service like PayPal, or they'll return the product for a full refund. But even though it may take several days for this process to complete, merchants don't have to pay fees on the transaction until the product has actually been shipped.

Now that you understand how a credit card transaction works, let's take a look at how a merchant's bank processes these requests. When a customer buys something with their credit card, the retailer's bank sends an authorization request to the customer's bank, which is usually the issuer. This request typically contains an account number, merchandise purchased, the purchase amount, and how long they authorize the card to be valid.

The issuer then checks this information against their database to see if the customer has enough available credit on their line of credit for that transaction to go through. If everything is okay, the issuer sends back an approval code called a "batch" to the retailer's bank. And every day, the merchant's bank will send these batches back to their corresponding acquirer where they're reconciled.

So why do some retailers accept checks if it's cheaper not to? The main reason is that some people prefer paying with a check or some other payment type for personal reasons. For example, a few people might be uncomfortable giving out their account information or find it more convenient to pay a different way.

Keep in mind that checking accounts also have a line of credit associated with them that the customer can use for purchases if they choose. And although most customers don't carry around this much money in their checkings' accounts, it's good for merchants to stay competitive, which is why some still accept checks even though it costs more.

Author's Note

To best understand credit card processing you need to know how credit card transactions work. Whenever a customer buys something, the retailer swipes the customer's card through either a machine or handheld device, enters the purchase amount, and then either imprints or manually keys in an account number into that machine. That information is sent to the merchant's bank, sometimes called the acquirer, which verifies that the customer's account has enough funds to cover the purchase and approves or declines the transaction.