CREDIT AND DEBIT CARDS PROCESSING

The bankcard networks that ferry billions of transactions between merchants, processors and banks are truly modern marvels. In just a matter of seconds, your terminal passes transaction information to a processor, and then through the card network to the issuing bank for approval. The issuing bank then sends an authorization back through the card network to your processor before it finally ends up back at your terminal or software.

How Credit Card Processing Works: Key Players

The key players involved in authorization and settlement are the cardholder, the merchant (business), the acquiring bank (the business’s bank), the issuing bank (the cardholder’s bank), and the card associations (Visa and MasterCard.)

Cardholder

If you have a credit or debit card (as most of us do), you’re already familiar with the role of the cardholder. But just to be thorough — a cardholder is someone who obtains a bankcard (credit or debit) from a card issuing bank. They then present that card at a business to pay for goods or services.

Merchant

Technically, a merchant is any business that sells goods or services. But, only merchants that accept cards as a form of payment are pertinent to our explanation. So with that said, a merchant is any business that maintains a merchant account that enables them to accept credit or debit cards as payment from customers (cardholders) for goods or services provided. You as a business owner are a merchant.

Acquiring Bank (Merchant’s Bank)

An acquiring bank is a registered member of the card associations (Visa and MasterCard). An acquiring bank is often referred to as a merchant bank because they contract with merchants to create and maintain accounts that allow the business to accept credit and debit cards. Acquiring banks provide merchants with equipment and software to accept cards and handle customer service and other necessary aspects involved in card acceptance. The acquiring bank also deposits funds from credit card sales into a merchant’s account. Interestingly enough, many merchants don’t recognize their acquiring bank as the primary provider of their merchant account. Acquiring banks are playing an increasingly hands-off role as the bankcard system evolves. Acquiring banks often enlist the help of third-party independent sales organizations (ISO) and membership service providers (MSP) to conduct and monitor the day-to-day activities of their merchant accounts.

Issuing Bank (Cardholder Bank)

As you’ve probably guessed, an issuing bank issues credit cards to consumers. The issuing bank is also a member of the card associations (Visa and MasterCard).

Issuing banks pay acquiring banks for purchases that their cardholders make. It is then the cardholder’s responsibility to repay their issuing bank under the terms of their credit card agreement.

Card Associations (Visa and MasterCard)

Visa and MasterCard aren’t banks and they don’t issue credit cards or merchant accounts. Instead, they act as a custodian and clearing house for their respective card brand. They also function as the governing body of a community of financial institutions, ISOs and MSPs that work together in association to support credit card processing and electronic payments. Hence the name, “card associations.”

Credit card clearing and settlement

The second part of how credit card transactions work is clearing and settlement. This occurs after the authorization process takes place. For settlement, the merchant (that’s you) sends a “batch” of authorizations to your processor, typically once per day. The processor reconciles the authorizations and submits the batch over the card association networks. The processor also deposits the funds from those sales into the business’s bank account and deducts processing fees. At that point, the business’s role is complete.

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