How Does Credit Card Processing Work?
Understanding how credit card processing works is necessary if you want to know about how the transaction processes take place and what fees are you being charged for and why.
So how does Credit Card Processing Work?
When you swipe your credit card while you are out shopping or purchasing something, you get a text message from your merchant that tells you about the transaction that has been done using your credit card.
But numerous other processes happen alongside, and for that, you are charged hidden fees and additional charges. Given below are insights into how the money is received by the other party when you swipe your card.
- At a point of sale terminal or online shopping site, a cardholder uses his credit card to make payment for his purchase.
- Then the transaction information is passed through a secure connection to the payment processor by the card reader or payment gateway.
- The credit card network with which the card is linked with receives the payment information from the payment processor. The payment processor collects and transmits data to other stages in the process.
- The information is then passed to the card holder’s bank by the card network. The bank is called the issuing bank.
- When the issuing bank receives the payment request, it verifies the availability of the amount of money in the customer’s account to process the request. If the cardholder has enough funds a message, whether payment is approved or declined, is sent back to the credit card network.
- The information of authorization is sent to the payment processor, and from there it is forwarded to the card reader.
- Once the transaction is complete, the merchant delivers the purchase to the customer.
- The merchant submits the credit card payment details to the acquiring bank that is a merchant bank for settlement.
- The request for settlement is then raised by the acquiring bank to the issuing bank as soon as it receives the credit card payment.
- The merchant bank then receives a settlement payment by the credit card issuer the next day.
- Before the merchant bank receives the payment, specific fees are deducted from it and then it is deposited into the merchant’s bank account.
This process takes around 2-3 days approx. In simple words, to understand, this is how the processing takes place:
- You visit a store.
- You purchase a $10 worth of merchandise.
- Then, you swipe your credit card through a payment processing terminal to pay for the merchandise.
- The card reader recognizes who the customer is and contacts the bank that issued the credit card.
- Your bank sends $10 to the merchant’s bank.
- Then the merchant’s bank deposits $9.80 to the merchant’s bank account.
- That remaining 20 cents, a 2% fee, is taken from the $10 and given to your bank.
- And your bank then splits the 20 cents with the credit card company.
Where the money gets made by the credit card companies?
Credit Card Companies make money for the service they provide in numerous ways.
Some of which are:
- Through fees: such as the annual fee, over-limit fee, and past due fees. It is the most popular way credit card companies make money.
- Through interest on revolving loans: If you don’t make your monthly card payments on time.
- A percentage of each item you purchase: They make a percentage of each item you are buying from a merchant who accepts your credit card.
So, this how the credit companies make money for the services they provide and understanding and knowing about it might help you learn the reasons behind some fees being charged to you every time you make a transaction with your credit card.