How Credit Card Processing Works

The "Merchant" is the name for the business that takes credit cards. The Merchant must open a "Merchant Account" with a "Merchant Bank," also called a "Sponsoring Bank" or a "Acquiring Bank," in order to accept credit cards.

This is the bank that gets the "Net Settlement Amount" from the "Issuing Bank" after the transaction is processed. The "Discount Rate" is the difference between the actual sale price and the "Net Settlement Amount." In some cases, merchants may also have to pay "Pass-through Fees," which are extra transaction fees that are charged when a transaction doesn't meet a certain requirement, like passing the Address Verification System (AVS) test.

Steps for Processing a Credit Card

1. A "hold" for that amount is put on the Cardholder's Open To Buy, which lowers the amount of money the Cardholder has available for future purchases.
2. The Issuing Bank checks to make sure that a valid credit card number was received and that the Cardholder has enough money available ("Open to Buy") to pay for the transaction.
3. The Processor connects to the Visa/MasterCard network so that the Authorization Request can be sent to the computer network of the Issuing Bank.
4. A transaction starts when the magnetic stripe on the back of the credit card is swiped through a credit card terminal or when the credit card account number is typed into the system by either the merchant or the cardholder. This puts the information about the transaction into the network of the Processor.
5. The Merchant's account is usually credited with the Net Settlement Amount by the end of the same business day.
6. Once the approval is received, a "Deposit Transaction," which completes the transaction, is sent. The merchant then gives the Cardholder the things they bought.
7. A "Request for Authorization" is made.

When Things Go Wrong with Credit Card Processing

There are, however, times when the process gets stuck and people have to help out. Even though the Visa/MasterCard network is 100% computerised, it is set up with a lot of "triggers" that will send a transaction to a person for closer inspection if one of those triggers is pulled.

Most often, these things happen:

Strange spending habits that don't fit with what the Cardholder usually buys.

Purchases of goods or services that are in a category called "high fraud."

Purchases made outside of the cardholder's home country. In fact, some Card Issuers require their Cardholders to let them know when they will be travelling outside of their home country.

Not that the whole cycle is repeated perfectly millions of times per hour, but that it all happens in just seconds!