How Credit Card Processing Works 

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Person holding a credit card machine and insert a card into it - How Credit Card Processing Works?

Credit Card transactions and processing happens in the blink of an eye but there is so much fit into that split second that you as a merchant should really understand. By taking the time to get a good grasp on just what happens during the entire credit card processing process will help you be able to get a handle on a lot of important factors. You will be able to utilize the info to help build a better customer experience. You will have the knowledge to answer your team and your customers just what has occurred if there are issues or problems with the process. You will also be able to understand and account for fees and chargebacks that may affect your bottom line.

So, to make the process a little more understandable we are going to, in this article, break down the process, go over who is involved and some of the terminologies you should understand. By doing this we hope we can help demystify the process and make your business flow more smoothly too! Before we dive into the deep end, we should probably look at some terms that you need to be familiar with.

Terms You Should Know

The process itself is something every merchant or manager must deal with when running a merchant business. Though you may know that it is an important aspect of your business some of the terms may not be so familiar. So below we have pulled together a list of some of those terms:


  • Routing Number:


Sometimes known as the transit routing number this number is the number sequence that tells the system which bank this card belongs to.


  • ACH:


This is an acronym for the Automated Clearing House which is a network that allows for electronic transfers of money and is governed by the Federal Reserve.


  • Acquirer:


This is the middleman. The acquiring bank is the account that is acting as the account for whatever merchant has signed up for their service. This bank has built partnerships with both other banks as well as credit card companies and makes sure that all transactions get cleared and the money finds its way to the appropriate accounts.


  • Issuing Bank:


This is the bank that supplies the card to the customer. This is where the money that is taken for the transaction comes from.


  • Merchant Account:


This is an account that is signed up for by a merchant that will ultimately allow them to accept credit and debit cards for their transactions.


  • Merchant Terminal:


There is a lot of other names for this term. Some may call it the POS, the payment terminal or even the credit card terminal. This is the part of your cash wrap or cart system that gives you the capability of reading the card to complete the transaction.


  • Virtual Terminal:


This is a system that is used to complete the credit card processing process through online software. It stores all credit and debit transactions as well.


  • Payment Gateway:


This is a service/system that is used to transmit the data that has been encrypted from the POS to the actual processor of this payment


  • Payment Processor:


This is the service or business that was chosen by the acquiring bank to move the transaction through the appropriate steps.


  • Payment Facilitator:


This is a company that offers a larger merchant account that is shared for a merchant to use as their account. They tend to have fixed rates and are good for smaller startups.


  • PCI Compliance:


These are rules and regulations put in place by the PCISS Council (Payment Card Industry Security Standards).


  • Interchange Fee:


These are the fees you pay for every transaction completed with a credit or debit card.


  • Chargeback:


This is what it called when a customer files a claim on the charge. If the claim is found true, the money is taken from the merchant’s account plus a small additional charge and returned to the customer.

With that lexicon of terms under your belt, you will be able to better units and the overall credit card process in general. Knowing what all those new words and concept are will help your team and your business gets the job done in a timely professional manner which will build trust and relationships. But first who are the people involved in the process.

Participants in Process 

Understanding the terns is one thing but there is another aspect that you need before heading into the process itself. Knowing the participants and understanding who they are may help you have clearer communication between you and them. It can also help you deal with issues that may arise with customers during and after the transactions. So, here are the four main players in the process:

Merchant Bank

This is where your funds will be deposited and withdrawn from. There are times where this player will not only act as your piggy bank but also the processor of your transactions.

Credit Card Processor

The processors are like the middleman or the string between the cans so to speak. They take the info and past from you to the customer’s bank.

Card Network

These are the guys that have their logo on the card and help keep the flow of information going regarding the transaction to both the cardholders bank as well as the merchant bank.

Issuing Bank

This the bank that issued the card to your customer. This is the entity that takes the information and makes sure that there is no fraud and that the customer can afford the transaction.

So now you know the terms and you know the participants in the process now all that’s left is to get a good grasp on the overall process itself.

Credit Card Process

This process is simply to make sure that the customer can afford to complete their transaction as well to combat potential fraud. The process itself can e stripped down into some very simple steps that follow a set path:

It all starts with the customer

This is the part of the process where the customer finishes adding things to their cart or heads to the POS for completion of the transaction. The process starts once the customer has swiped their card at the terminal or inputs their card info.

Once that is done the next step turns the power over to the merchant

This is where the merchant takes and accepts the cards information. You can do this in a card-present or not present transaction. This simply means that either the customer has the card-present like in most brick and mortar stores. Or you can take the info without the card which is usually done through an online payment system or cart set-up.

Now the info is sent to processor

The data from the transaction is sent to them to be routed to the other parties involved in the process. The first step of this is to send the transaction information to the card network.

Now that the card network has the transaction information…

Al, cards are affiliated with one of the cards networks like Visa or American Express. Once they get that information, they send it to the customer’s bank.

With that information firmly in the consumer’s banks hands…

This is where the verification and final authorization happens. Upon receiving the information for the transaction this bank makes sure that the customer is using the card that is assigned to them as well as makes sure they have the appropriate funds to cover the receipt. No matter what the case maybe they then send the data they gathered back to the source of the inquiry.

That means that it heads back to the merchant for the final step…

Finally, to round out the credit card processing process that information comes back to you the merchant as an accepted or declined message.

Now that you know the steps and processes in those steps you will be able to help the process flow more smoothly o your end and therefore your customers as well.

Final Thoughts

Taking time to get to know the processes and terms associated with running a merchant business will allow you and your team a level of efficiency that is a cut above the rest. There are so many benefits to having a good wealth of knowledge especially when it comes to dealing with your and your customer’s money. Often this proves seems like a snap but with technology but there can always be problems. When this occurs having answers to questions and concerns from all parties involved will help your team look professional and create a fluid process to handle them. This, in turn, will build trust with your customers and allow you to run a tighter ship. So hopefully with the terms list, a clear idea of who is involved in the process and the steps that the transaction takes to get to where it needs to you and your team feel a little more confident.


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