If you are planning to accept credit cards as part of your business it is beneficial to understand how the process works and what parties are involved.

The Parties Involved

The merchant account provider (acquiring bank) is the bank that the merchant uses to setup up credit card processing. The merchant account provider connects the merchant to the customer via the credit card network.

The customer’s credit card is provided by a card issuing bank.

The Credit Card Transaction Process

When customers purchase a good or service from a merchant the following steps occurs.

Inputting the Credit Card Information

There are basically two ways that credit information is input. It is either swiped or keyed in. If the purchase begins at a “brick and mortar” type of business (barber or grocery store) then the card is usually swiped using a point of sale (POS) machine. This machine reads the information off the magnetic strip on the back of the card.

If the transaction is done over the internet or by mail order or over the telephone then the information cannot be swiped and must be keyed in. Since a keyed in transaction has a greater potential for fraud additional information is generally required to process the transaction like the 3 or 4 digit card security number, the card holders billing address and phone number. In the event of an internet transaction the keyed in information travels through a payment gateway which works similarly to a POS.

Authorizing

After the credit card information is input, the merchant account provider connects to the customer’s credit issuing bank to ensure that sufficient funds existing for the purchase. If they do, then a hold is put on those funds and authorization code is sent back to the merchant and merchant account

Batch Processing (Transfer the money)

During the course of the day the various merchant transactions are stored by the merchant account provider. By the close of the day these transactions are batch processed, which results in money being transferred from the card issuing bank to the merchant account bank. Before this done the card issuing bank subtracts a fee and then merchant account bank also takes a fee.

Here is example with hard numbers. If a $100 service is purchased and the merchant account fee is $0.50 and the card issuer’s fee is two percent then first $2.00 is subtracted and given to the card issuer and then $0.50 is subtracted and paid to the merchant account provider, leaving $97.50 for the merchant.

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