Sometimes, those things that seem straightforward often turn out to be as complicated as a puzzle. For instance, many people view the credit card transaction as a process that happens in real-time. However, this isn’t so. There are many behind the scenes activities that occur before the transaction is approved and marked complete. If you are a merchant or a cardholder, knowing the processes involved can be quite helpful at some point.
Credit card transactions aren’t processed the way we think they are; they involve several players and processes.
Below are the steps involved:
- Swipe your credit card for approval
- Credit card authorization
- Credit card approval
- Batch process
- The credit card issuer transfers payment
- The merchant receives payment
- The card issuer charges you
Understanding the “behind the scenes” activity of a card transaction may seem irrelevant to you. However, don’t forget that when issues arise, information like this would be beneficial as it will help reduce panic and give you direction. Also, you may end up being a merchant tomorrow. And as a merchant, knowing the inner workings of credit card transactions would be very helpful to you and your business. In this article, I’ll reveal those behind the scenes activities that happen when a transaction takes place.
Find out if you should be worried if a credit card transaction is not showing up.
What Are Credit Card Transaction Steps?
To most people, credit card transactions occur at the speed of light. Of course, it is an online transaction, so things should be as fast as the internet on our 4G or 5G devices. While this seems logical a bit, it is a total fallacy. In fact, some transactions can take as long as five days to be approved and posted. It is also the same with debit card transactions. Maybe if credit card users were few, the process would have been completed instantly.
What does this all mean for cardholders? Well, it simply means that when you swipe your credit card in that grocery store or mall, the transaction goes through several steps before it is posted. The money meant for the transaction isn’t immediately withdrawn and transferred to the merchant’s account. For clarity, let’s take a closer look at the processes involved.
Step 1: Swipe your credit card for approval
The first step in the credit card transaction process involves you swiping your card at that fuel station, mall, grocery store, or what have you. Afterward, a signal is sent to the merchant bank via the payment terminal. The purpose of the signal is to ask if you can make a credit card purchase.
Many newer credit and debit cards are equipped with a microchip tech that contains information regarding the account associated with the card. So instead of swiping your card, it is inserted into the card reader. These cards are regarded as smart cards, and they are said to be less prone to fraud.
Step 2: Credit card authorization
The next step is the credit card authorization. Here is where things start getting complex. The merchant bank communicates with the credit card network (Visa, MasterCard, and the likes) to obtain authorization for the credit card transaction. Afterward, the credit card network communicates with the credit card company to ensure that the credit card contains adequate money for the transaction.
Credit card networks like American Express and Discover are also credit card issuers, so the approval is done by themselves. But Visa and MasterCard don’t issue cards, so they must contact the necessary organization for approval. The credit card company transmits an authorization code for the transaction. In the event that your card was declined, you’ll be notified. You’ll have to contact the credit card company for information on why your card was declined.
Step 3: Credit card approval
At this point, the merchant bank approves your purchase and sends it to the merchant. Afterward, you’ll be given a receipt where you sign. After signing and leaving with your purchase, your credit card has only been authorized for the payment. The money hasn’t been transferred to the merchant yet. At this junction, if you check your transaction list, you may see the transaction as pending.
Step 4: Batch process
The batch process is where the merchant sends the bank a formal request for payment. This doesn’t happen quickly. Rather, most e-commerce merchants reserve their authorization transactions in batch and send them later (usually at close of the business day).
As soon as the batch is done, the merchant distributed all the authorized transactions to the processor for cataloging. Afterward, the processor passes them on to the merchant bank.
Step 5: The credit card issuer transfers payment
Here the process is almost complete. The credit card network, be it Visa, MasterCard, and the likes, notifies the credit card company on what payments are due. The credit card company or issuer charges a small fee, which is known as the interchange fee. The interchange fee is usually shared with the credit card network. Because American Express and Discover operate as a credit card network and credit card issuer, their percentage is usually higher.
Step 6: The merchant receives payment
This is where the merchant bank receives the funds, removes its payment, and deposits the credit card charge in the merchant’s account. Due to the fees collected by various players involved in the credit card transaction process, there is a huge possibility that the money you paid to purchase a product wouldn’t match the amount paid to the merchant. Most merchants usually take note of this and add it to the fee of the product.
Step 7: The card issuer charges you
Every month, you get a bill from the credit card company. This bill usually displays the charges made during the month. If you have the money, you can settle the whole charge. If you don’t have enough money, you can settle part of the charges. However, you need to understand that you’ll have to pay interest on the amount you owe if you settle part of the charges. The credit card issuer uses the funds and the interest you remitted to settle merchants as new transactions are initiated.
Find out if you should be worried if a credit card pending transaction disappeared.
