Credit and debit cards are a convenient payment system. However, for just being plastic cards, there is a lot that goes into their payment processes. To conduct a payment transaction, there is a whole process that involves the cardholder, merchant, and issuing banks and credit card networks. Read on to find out how credit card transactions work.
Authorization
Authorization is the first stage in any credit card transaction. Ultimately, this is when banks approve the payment to the merchant. Users swipe or insert their smart cards using an integrated circuit chip into the POS system to process it. This is an EMV payment method since it uses smart payment cards with a chip as well as a magnetic strip for backward compatibility. Once this transaction occurs, it sends information to the issuing bank through an internet connection. The bank forwards the credit card details to the credit card network. Afterward, the credit card network approves the payment and requests the credit card number, card expiration date, billing address, card security code (CVV), and payment amount.
Authentication
After the authorization stage, someone must authenticate the process. The issuing bank validates the credit card with fraud protection tools (AVS) and card security codes (CVV, CSC, CVC, CID). It starts with the credit card network sending the payment authorization request to the issuing bank. Then, the issuing bank validates the credit card number, the funds, billing address, and CVV number. The bank then can either approve or decline the transaction and will notify the merchant. Once the bank approves the transaction, it will hold the purchase amount on the cardholder’s account. The bank will then send the approved authorizations to the merchant where it splits up between the POS system and other processing providers. These providers only offer a single integrated payment solution where merchants must to use their processor and pay a fee.
Clearing and Settlement
In the clearing and settlement stage, the transaction shows in the cardholder’s monthly billing statement as well as the merchant’s statement. Once a business day ends, all approved authorizations collect in batches. They then make their way to the acquiring bank. The bank routes the batched information to the credit card network. Once there, the credit card network forwards each transaction to the issuing bank. Within 24 to 48 hours, the issuing bank transfer the funds. During this stage, the acquiring bank pays a fee to the issuing bank known as the interchange fee. In this case, the issuing bank shares the funds with the credit card network. The credit card network then pays the acquiring bank their percentages. The acquiring bank credits the merchant’s account. Merchants pay a fee to their integrated payment processor known as the merchant discount rate. Afterward, the issuing bank posts the transaction information to the cardholder’s account. The cardholder will then receive a statement and bill.
At Business Software Solutions, Inc., we design our credit card processing systems for easy usability and fast reliability. We offer integration with multiple companies to give our customers plenty of available choices. Whether it’s for restaurant, retail, or hotel industries, our integrated credit card processing ensures accurate and secure transactions every time.
