Credit Card Processing – How Does it Work

While the process of purchasing goods and services by swiping your credit card might seem very simple, there is actually a rather complex process at work behind this seemingly easy transaction.

We have explained below, in 6 easy steps, how credit card processing works.

1. The Purchase 

When you like a product or service, you purchase it with your credit / debit card, instead of cash. This is the ‘point of sale’ or POS, where your credit card details are keyed in. The POS could be the actual electronic card reader in a retail store, or it could be the merchant’s website through which you make your payment.

2. Data Transmission

Once the card is swiped in the reader, or its details keyed into a mobile device, or as in the case of an e-commerce portal, the credit card details keyed in by the customer – the details are recorded and transmitted through a ‘payment gateway’ application.

The payment gateway facilitates the transfer of sensitive card information between the POS (website, mobile device, retail store card reader) and the merchant’s acquiring bank, where the merchant/shop owner has his business account. Often, a third-party, called the payment processor, which functions on behalf of the merchant bank, collects these details. 

3. Payment Processor Screenings

Payment processors, usually a third-party employed by a merchant acquiring bank, screen and forward the card and transaction details to the merchant bank, the card association for verification and finally to the customer’s bank, which issued the credit card. Additionally, the payment processor also looks into aspects like the card’s country of origin, its former transactions and ensures anti-fraud measures to authenticate the transaction. 

4. Approval

This is a crucial step which involves the card association (Visa, MasterCard etc.), the merchant acquiring bank and the customer’s issuing bank. These institutions screen through every detail about the transaction. Though done through software applications, these processes determine the authenticity of the card, its expiry date, the card-holder’s details and the available balance in the customer’s account. 

Once the security screening and verifications are done by these institutions, the approval is sent back electronically to the payment processor. The payment processor transmits the approval once again via the payment gateway and back to the merchant. In case a transaction is not approved, the merchant receives an alert.

5. Completion of Transaction

This is the final stage where the transaction is all set to be completed. The merchant extracts copies of the receipt from the card reader, one for the customer, and the other as a copy for the merchant bank, which requires the customer’s signature. 

In case of a mobile or e-commerce website, the customer receives a message alert from the issuing bank, on the amount of money debited from the account, and the date and venue of the purchase.

6. Submitting a Closure

Closures are statements of all the credit card transactions made in a single day, which are forwarded by the merchant to the merchant acquiring bank. The acquiring bank then collects the funds from the respective issuing banks and deposits that amount into the merchant’s business account. This typically takes 48 hours.

Advanced computing technologies, employed for credit card processing today, allow the above complex procedures to be completed within a few seconds.