• Marc Primo

How Credit Card Payment Processing Systems Really Work

Updated: Apr 3, 2020

The following is an article “How Credit Card Payment Processing Systems Really Work”

by Marc Primo.

Ever wonder how the global economy works? Digital currency is expected to be the future, but we don't seem to realize it is already the present. Credit cards are pieces of plastic with an encoded number in a magnetic strip or chip, that is in no way related to any real moneys. Most people are not aware of the mechanics behind electronic payments. Why would they? As long as it works. Knowing a bit more about what goes on behind the curtain can help you resolve matter when things do go wrong.



Here is go it works:


The Buyer:


This is the person making the purchase. If the purchase is to be paid with a credit card with your name on it then you are participating in the game.


The Merchant:


If you ever open a business and want to accept credit cards as a payment method, then you need a merchant account. The person or company making the sale is the merchant. They receive your credit card information and set in motion a transfer of information that ultimately ends up with a successful transaction. Less money in you (the buyer's) account and an acquired product.


The Acquirer:


The acquirer makes sure the information the merchant has received goes to the right hands and ensures funds are transferred to the merchants account making the transaction complete. They often are a full service dedicated to the merchant's side of the sale, providing software that can be used to both make the sales and hold a record of the credit cards payments to the establishment.


The Issuer:


The issuer is merely the bank with which the buyer chose to do business with. They approve and extend the buyer credit depending upon their credit score, purchasing history, and late payment habits. They also distribute the payment on behalf of the buyer expecting payment themselves at a later date.

Credit Card Payment Process


Here is the transactional process according to CreditCards.com.


1. Authorization


In this part of the process, the merchant communicates with the issuing bank to confirm there are enough funds or enough credit in the buyers account to continue with the purchase.


The buyer decides to use a credit card and passes the information to the merchant. This happens by either swiping the magnetic strip, inserting the credit card chip or inputting the numbers by hand or over the phone.

The merchants terminal or software send the card info (card number, transaction amount, merchant UD) electronically to the acquirer.

The acquirer the sends the information the issuing bank as a request to authorize the transaction.


The issuing bank checks the buyer has enough funds or credit. It also checks for any signs of misuse. Anything that may lead them to suspect the card has been cloned like near-simultaneous transactions in different locations far from each other to avoid fraudulent activity. If no foul play is found and enough funds or credit is present the transaction is authorized. The issuer then sends an authorization code to the acquirer.

Once the merchant receives the authorization code, they proceed to give the buyer their purchased goods and finish the transaction.


2.Batching


Once the buyer has an authorized transaction and his/her goods have been handed over the buyers roles is complete. But not for the merchant.

The electronic transactions the merchants get approved are stored throughout the day. Each full day is known as a batch. At the end of the day, the merchant has to send the acquirer this batch.


3.Clearing


After the end of the business day the merchant sends the acquirer a full batch, the clearing process begins. Intermediaries get their cut. Usually 1%-3% depending on the card network. The issuer then routes the net amount through the card network to the acquirer.


4. Funding


The last and most important part of the process. This is when the merchant receives compensation or funding for the goods he/she sold. The acquirer deducts his rate for the transaction amount. Transactional fees typically less than 1%.


The remainder of the funds is then transferred to the merchants business account, and then the process is complete from the merchant's point of view.

It can be shocking how much happens when you use a credit card. The behind the scenes process of thousands even millions of daily transactions. At the end of the day, these are just number in computers being passed around no physical exertion whatsoever. The fragility of the system is mostly unknown since trusting the system is mainly what makes it work in the first place. The number of hackers out there using loopholes to create identity fraud steal from merchants acquirers buyer even the credit card networks is staggering.

But it might be best not to give it too much thought since it does make the world go round and it is adequately insured.