Millions of businesses, both small and large, accept credit card payments from their customers, but many business owners have questions about the services and processing that convert your customer’s plastic card into the cash that is deposited into your bank.
Understanding the steps involved in bank card processing can help business owners avoid potential roadblocks and reduce fraud, chargebacks and other challenges that can cost you time, productivity and profits.
Mobile, Online and Traditional Card Processing
How does credit card transaction processing work? It all begins when a cardholder, your customer, presents a credit card to pay for the goods or services you are selling. In a retail (or “card present”) location, the customer hands you their credit card for swiping at a Point of Sale (POS) Terminal. In an e-Commerce (also known as “card-not-present”) environment, the customer “presents” their credit card via your shopping cart’s secure checkout page for online card processing.
There are seven steps in the life of a transaction:
- Authorization: Whether the card processing is through an online retailer or at a brick-and-mortar location, this step is the process of requesting an authorization from the bank or company that issued the customer’s credit card. For online merchants, the shopping cart is connected to, or integrated with, a Payment Gateway.For retail merchants, the card is swiped through a magnetic reader on the POS Terminal. The Payment Gateway or POS Terminal then connects to a Front-End Processor. If the bank card was issued by Visa or Mastercard (V/MC), the Front-End Processor transmits the authorization to the Visa or Mastercard associations, which then route it to the appropriate issuing bank. Otherwise, the authorization is transmitted to the appropriate card issuer (Amex, Discover, Diners, JCB) for approval.The issuing bank or card issuer authenticates the cardholder and approves or declines the transaction amount. It is important to note that no money changes hands during the authorization. Merchants must re-present the transaction to receive payment. For retail merchants, the transaction is stored on the POS Terminal. For online merchants processing credit cards, the transaction is stored on the Payment Gateway.
- Merchant Balancing: The second step is called Merchant Balancing, which is the process of totaling the transactions and balances by card type and transmitting them to the Front-End Processor. This is also known as “batching out.” Most POS Terminals and all Payment Gateways for online companies perform an auto close function at the end of the day, and batch out automatically.
- Capture: The third step is called the Capture, which is the process of requesting payment from the issuing bank or card issuer. The Front-End Processor matches the authorization data to the settlement data and transmits the card capture file to a Back-End Processor for V/MC transactions, or to the appropriate card issuer for other bank card types. This applies to mobile or wireless card processing as well.
- Clearing: The fourth step is called Clearing. During this stage, the Back-End Processor performs compliance checks and risk management procedures, and transmits the transaction to V/MC or to the appropriate card issuer.
- Interchange (V/MC Only): The fifth step is called Interchange. During this stage the V/MC associations sort and transmit transactions to the appropriate issuing banks for settlement.
- Settlement: The sixth step is called Settlement. During this stage, the issuing bank calculates fees and deductions (i.e., chargebacks) and routs the net funds to the V/MC associations, who transmit them to the appropriate acquiring bank for payment to the merchant. For other card types, the appropriate card issuer determines the daily deposit for the merchant.
- Merchant ACH: The final step is the Merchant ACH. During this stage, the acquiring bank or card issuer transmits the merchant deposit to the merchant’s checking account.
The typical timeline for the transaction processing is three days. Remember that the amount of time a transaction takes to post to a company’s account is the same whether it’s a wireless, an online or a traditional transaction.
- Day 1: Authorization
- Day 2: Merchant Balancing/Capture/Clearing/Interchange/Settlement
- Day 3: Merchant ACH