How Credit Card Processing Works
Below is a MRR and PLR article in category Finance -> subcategory Wealth Building.
Understanding Credit Card Processing
Introduction
Credit card processing may seem complex, but it's a well-orchestrated system that ensures seamless transactions. Let's break down how it all works.
The Role of the Merchant
A business that accepts credit cards is known as a Merchant. To accept credit cards, a Merchant must open a Merchant Account with a Merchant Bank, also called a Sponsoring or Acquiring Bank. This bank receives the Net Settlement Amount from the Issuing Bank after processing the transaction. The Net Settlement Amount is the sale total minus transaction fees, known as the Discount Rate. Occasionally, additional Pass-through Fees may apply, such as when a transaction fails the Address Verification System (AVS) test.
Steps in Credit Card Processing
1. Initiating the Transaction
The process starts when the card's magnetic stripe is swiped, or the card number is manually entered by the merchant or cardholder, entering the transaction into the Processor's network.
2. Authorization Request
An Authorization Request is generated.
3. Network Connection
The Processor connects with the Visa/MasterCard network to send the Authorization Request to the Issuing Bank's network.
4. Verification
The Issuing Bank confirms the validity of the card number and checks if sufficient funds (Open to Buy) are available for the transaction.
5. Funds Hold
A hold is placed on the amount, reducing the cardholder's available funds for future transactions.
6. Approval and Finalization
Once approved, a Deposit Transaction is transmitted to finalize the transaction. The merchant then releases the purchased items to the cardholder.
7. Settlement
The Net Settlement Amount is usually deposited into the Merchant's account by the end of the business day.
Handling Issues
Despite the automation, issues can arise requiring human intervention. The Visa/MasterCard network is equipped with triggers to flag transactions for review when needed. Common triggers include:
- Unusual spending patterns.
- Purchases in high-fraud categories.
- Transactions outside the cardholder’s home country, often requiring prior notification to the Card Issuer.
Conclusion
It's fascinating that this entire process, repeated millions of times per hour, occurs in mere seconds! Understanding this system can help businesses and cardholders appreciate the intricate network facilitating their transactions.
You can find the original non-AI version of this article here: How Credit Card Processing Works.
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