How Credit Cards Work
Below is a MRR and PLR article in category Finance -> subcategory Wealth Building.
How Credit Cards Work
Introduction
Ever wondered what happens between swiping your credit card and seeing the charge on your statement? Let’s take a closer look at the journey of a credit card transaction.
The Anatomy of a Credit Card
The magic begins with the account number. This isn't a random string but a systematic combination that reveals the card type (Visa, American Express, etc.), bank number, account number, and a check digit. For American Express, it also indicates the currency.
The magnetic stripe on the back contains vital information such as the account number, cardholder name, country code, expiry date, and more, unique to the card issuer.
Key Players in the Credit Card Process
Several organizations facilitate each transaction:
- Acquiring Bank: Converts credit card purchases into cash for the merchant.
- Association: Represents the network of banks and issuers linked to a card brand like Visa or MasterCard.
- Cardholder: The person using the credit card.
- Independent Sales Organization (ISO): Offers basic services to merchants like accounts and funding reports.
- Issuing Bank: Authorizes card issuance to cardholders.
- Merchant: Authorized to accept credit cards.
- Payment Gateway: Provides terminals and networks connecting merchants to processing networks.
- Payment Processor: Transfers approved funds among various financial accounts.
The Authorization Process
This process, occurring millions of times daily, ensures secure and approved transactions:
1. The cardholder initiates a purchase.
2. The merchant accesses the Payment Gateway, sending credit card and purchase details.
3. The gateway finds the merchant’s acquiring bank and ISO, forwarding the transaction to the Payment Processor.
4. The processor identifies the Issuing Bank and forwards the transaction.
5. The issuing bank checks the account status, spending limits, and security details. If valid, it reduces the available balance and sends an authorization code back. If not, a decline message is sent. In fraud cases, an order to confiscate the card may be issued.
6. The processor relays the approval or decline code to the payment gateway.
7. The gateway informs the merchant, who completes or cancels the transaction based on the response.
End of Day Settlement
At the end of each day, the merchant conducts a capture routine, sending all transaction details to the Payment Gateway. The gateway forwards this to the Payment Processor, which identifies the issuing bank. The bank then electronically transfers funds to the acquiring bank, which deposits them into the merchant's account. And everyone is satisfied.
By understanding these behind-the-scenes processes, you can appreciate the complexity and efficiency of using credit cards.
You can find the original non-AI version of this article here: How Credit Cards Work.
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