What Is Credit Card Processing?

Credit card processing is the system used to manage transactions which are made by credit card. There are multiple entities involved in the process, which can make it complex. Understanding credit card processing can better allow e-commerce merchants to know what services are provided by firms and what fees they can expect to be charged for each transaction.

The Parties Involved in a Transaction

A credit card transaction will usually involve at least 7 participants. These are the consumer, merchant, acquiring bank, payment gateway, interchange for the credit card, the credit card issuer and the acquiring bank of the merchant. Despite the parties involved in a transaction, it can be completed in as little as two seconds.

How the System Works

Whether the customer uses their credit card to make a purchase online or in a physical store, the process is largely the same. Once the transaction is initiated, the credit card data will be transmitted through a network. As the data travels through the network, it will make multiple stops. The first of these stops is the payment gateway.

The payment gateway will then send the data to a processor, which will then forward it to the interchange for the credit card. Once the data has passed through the interchange it is sent to an issuing bank, which will confirm that the customer’s credit card has the necessary funds to cover the transaction. From the payment gateway to the issuing bank, fees will be assessed and accumulated.

When a transaction is approved, the authorization details are sent to the merchant account for the acquiring bank, and finally to the bank account of the merchant themselves. Credit card processing is a complex industry, and merchants may need to spend as much as six months learning the terminology and how the system works. One of the best ways to visualize the system is through diagrams.

Online vs. Offline Credit Card Processing

While online and offline credit card processing is quite similar, there are some slight differences between the two. A customer who uses their credit card in a grocery store, for example, will usually swipe it through a terminal, where the data will be read and transmitted. The cashier may also print a receipt which the customer must sign. When a customer wants to purchase a product from a website, they will not scan the card through a terminal, but will instead enter their credit card number and other details on a form, where it will then be submitted for authorization.