There are five elements involved in the processing of credit card transactions. These five elements are the buyer, seller, acquiring bank, issuing bank, and the card association. The acquiring bank represents the seller, while the issuing bank represents the buyer. Understanding these five elements and how they work together is the key to understanding how credit card transactions are processed.
The Buyer and Seller
These two elements are the easiest to understand. The buyer is the individual who has the credit card, and intends to use it to complete a transaction. The card is provided to them by their issuing bank, and they will then offer it to sellers for payment. The seller is the business that offers their products and services in exchange for the payment that will be made with the credit card. The seller must have a merchant account where the funds from the buyer’s card can be placed.
The acquiring bank must be a member of a credit card association (typically MasterCard or Visa). It is sometimes called the merchant bank because they create contracts with sellers that allow them to accept credit cards as a form of payment. They will also provide the sellers with the hardware and software which will be needed to process the transactions. When a seller receives payment via a credit card, the acquiring bank will place the funds into the seller’s merchant account.
The issuing bank is the bank responsible for providing credit cards to the buyer. They may also be a member of a card association, and must answer to them. An issuing bank will pay an acquiring bank for any purchases that are made by buyers who use their cards. However, the buyer is responsible for paying back the issuing bank based on the agreement which they signed when the credit card was issued to them.
Card associations are best thought of as clearing houses. They should not be confused with banks and they do not provide credit cards to buyers or sellers. They are a regulatory body which oversees a group of financial institutions. The primary function of a card association is to regulate institutions which are associated with them. They are responsible for establishing fees and guidelines, and they can also serve as intermediaries between banks. They will also manage the network that is used for their respective cards. Card associations are for profit entities, and many are publicly traded companies.