If you've ever wondered how credit card processing works, you're not alone. Credit card processing is one of the most important - and least understood - aspects of modern commerce.
Credit card processing is the behind-the-scenes activity that happens when a customer uses a credit or debit card to make a purchase. The process starts with the customer swiping or inserting their card into a card reader at the point of sale (POS).
This action triggers a series of events that includes the authorization of the transaction, the transfer of funds from the customer's account to the merchant's account, and the recording of the transaction in each party's books.
In this article, we'll take a closer look at each step of the credit card processing cycle and explain what role each player - the customer, the merchant, the acquirer, and the issuer - plays in making it all happen.
At its most basic level, credit card processing is the process of exchanging money between a customer and a merchant. But there's a lot more to it than that.
For starters, credit card processing involves four different parties: the customer, the merchant, the acquirer, and the issuer.
Each party plays a specific role in the process, and each has its own set of responsibilities.
Let's take a closer look at each one:
The customer is the person who uses their credit or debit card to make a purchase.
The merchant is the business owner who accepts credit and debit cards as payment for goods or services.
The acquirer is the financial institution that provides merchants with the ability to accept credit and debit cards.
The issuer is the financial institution that issues credit and debit cards to customers.
Now that we've reviewed the different parties involved in credit card processing, let's take a closer look at the process itself.
The credit card processing cycle can be broken down into four main steps: authorization, clearing and settlement, funding, and reconciliation.
Authorization is the first step in the credit card processing cycle. It happens when a customer swipes or inserts their credit or debit card into a card reader at the point of sale.
This action sends a request for authorization to the acquirer, who then forwards it to the issuer.
The issuer reviews the request and either approves or declines it. If the request is approved, the issuer sends an authorization code back to the acquirer.
The acquirer then forwards the authorization code to the merchant, and the transaction is complete.
Clearing and settlement is the second step in the credit card processing cycle. It happens after a transaction has been authorized.
In this step, the acquirer sends the transaction details to the issuer for clearing.
Once the transaction has been cleared, the issuer settles the account with the acquirer.
The acquirer then pays the merchant for the transaction, minus any fees that may be due.
Funding is the third step in the credit card processing cycle. It happens after a transaction has been cleared and settled.
In this step, the acquirer transfers the funds from the customer's account to the merchant's account.
The merchant then has access to the funds and can use them as they see fit.
Reconciliation is the fourth and final step in the credit card processing cycle. It happens after a transaction has been funded.
In this step, the merchant and the acquirer reconcile their records to make sure that everything is correct.
This process ensures that both parties have accurate records of the transaction and helps to prevent fraud.
Credit card processing is a vital part of modern commerce, but it's also one that can be confusing for businesses and consumers alike.
By understanding the different parties involved and the steps involved in the process, you can get a better sense of how it all works.
