How Credit Card Processing Works

When you accept a credit card as a form of payment for your store, you actually undergo an elaborate procedure called credit card processing. In a nutshell, this process involves the flow of financial information and, in turn, money from one party to another. It starts when a cardholder uses his or her card to make a purchase.

The process can be classified into four parts: the verification, the batching, the clearing, and the funding.

First, the cardholder makes the purchase and uses a credit card. The merchant then inputs the card’s information onto the credit card terminal—either by swiping it (which is commonplace in retail and physical stores) or typing in the information. Strictly speaking, it is when the card is swiped that credit card processing begins. This allows the merchant account provider of the merchant to verify the card. Verification, the first step, entails making sure that the card is valid. A store verifies the card to make sure that the cardholder has not exceeded his credit limit, for example, or to ensure the card isn’t stolen. This is done almost instantaneous. When the card is invalid, the transaction will not proceed.

Once verified as an active and valid credit card, the purchase information is stored and sent by batch to the credit card processing service provider. The batching and sending out of credit card purchase information happens every day. The provider, in turn, sends the information to the credit card associations (such as Visa and MasterCard) in order to collect the payment.

Once the card associations clear and settle the purchases, they pay the processing service provider. This is the clearing part of credit card processing, where the credit card provider and association check the validity of the information before they make the payments.

Last in the credit card processing procedure is the funding, wherein the service provider gives the payments to the merchant, minus the transactions fees. This happens almost instantly and constantly, usually in a span of two to three days. Of course, due to the nature of the process, the merchant gets paid even before the credit card holder actually pays for his or her purchase.

By: Kate Hammond

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