How Credit Card Processing Works

Understanding the basics of credit card processing is important for any business owner who wants to accept credit card payments for goods or services.

From the customer's point of view, using a credit card to purchase goods or services seems like a fairly simple and easy procedure. But the truth is that credit card processing is actually not a simple process at all. The minute the high risk merchant captures the customer's credit card number, it sets off a complex series of transactions till approval is received from the credit card issuer.

Moreover, from the high risk merchant's perspective, the transaction does not finish when the customer walks out the door, hangs up the phone, or leaves the website. There are a couple more steps that must occur before the money from the sale will be deposited into the high risk merchant's bank account.

Credit Card Lingo

Before learning the steps of credit card processing, the high risk merchant should first be familiar with some basic terms and concepts.

The customer, referred to as the cardholder, receives a credit card or debit card from an issuing bank or organization.

On the other end, any business that wishes to accept credit cards or debit cards, must first open a high risk merchant account. The bank that issues this account is known as the high risk merchant bank.

Once a cardholder's information has been entered into a credit card terminal or any online interface, it is sent to the credit card processor's network. The credit card processor is the company that actually processes the transaction. It's main function is to handle the "communication" between the issuing bank and the high risk merchant bank until the transaction is completed.

The money that is deposited to the Merchant's account is called the net settlement amount. It represents the total transaction amount minus any processing fees that were incurred.

Credit Card Processing Steps

Once a business has activated either a retail or Internet high risk merchant account it can accept credit cards from customers. The process generally goes like this:

1. A transaction begins when the cardholder presents his or her credit card for payment. The credit card number and transaction information is entered into the high risk merchant's transaction processing system (a credit card terminal, computer, or website).

2. The information is then forwarded into the processor's network along with a request for authorization to secure funds in the amount of the purchase from the cardholder's credit card account.

3. The credit card processor links up with the credit card network in order to transmit the "Authorization Request" to the Issuing Bank's computer network.

4. The Issuing Bank verifies the credit card number and checks that the cardholder has enough money available to fund the transaction.

5. A "hold" for the transaction amount is placed on the cardholder's account, thus reducing the available balance for future transactions.

6. Once the approval is received the processing network sends a response to the merchant's credit card terminal or computer interface.

7. At the end of the business day, the merchant sends a request to the processing network to secure the authorized funds from all the credit card transactions conducted through out the day.

8. The total amount of all the credit card transactions, minus any processing fees, is then deposited into the merchant's business bank account.

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