How Credit Card Payment Processing works

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					                     How Credit Card Payment Processing Works

      Credit cards, the plastic payment solution that has become the payment
convenience for countless consumers… Can your business accept them? It should.
From the a business perspective, credit cards increase sales, opening up payment
options to customers who may not have had cash on hand for the purchase.

      The revenues generated by credit card use are closely approaching the 200
billion dollar mark, and your business can benefit by climbing on board and
offering credit card payment processing.

      The information below will give you a thorough understanding on how
credit card processing works and what your business should know before you sign
with a service provider.

      Credit card processing is a cycle… The process can is composed of four
steps: authorization, batching, clearing, and funding.

      Click    for
understanding the process better. Here are some of the terms and steps involved,
what they are and how they work:

      Acquirer – a bank, which is often a 3rd party provider, who processes and
settles merchant credit card payments. This can be a bank providing your

merchant account or a service that provides it to your processing company. The
acquirer works with the credit card issuer.

      Authorization – is the first step that happens after the credit card is swiped.
The purchase and card information are sent to the acquirer who, in turn, sends the
same information to the credit card issuer. The credit card issuer then accepts or
declines the transaction. If accepted, an authorization code is generated and the
purchase transaction is continues to the next step, namely: batching.

      Batching – is the review process done by a merchant on all credit card
transactions for the business day. The review process involves ensuring all credit
card transactions are authorized and signed by the cardholder. After the review
process, the merchant sends the information as a batch to the acquirer to receive
clearing for payment.

      Cardholder – he is the customer as specified on the credit card, the customer
so to speak.

      Card network – these are networks that act as an intermediary between the
acquirer and the issuer. Card networks transfer the information originating from
the acquirer to the issuer about the purchase. This happens in the authorization

      Clearing – the third step in the payment process which happens after the
acquirer sends the batch information through the card network to the issuing bank.
The card network acts as a router depending on the credit card issuer found on the

purchase detail. This process permits revenues for both the issuing bank and the
card network called the interchange fee. After deduction of interchange fees, the
issuing bank sends the information back to the acquirer through the same card
network used.

      Discount fee – this fee is paid for by merchants to the acquirer to cover
processing costs.

      Funding – the fourth step in the credit card payment process. This involves
the acquirer sending back the transaction information to the merchant less the
discount fee. The merchant receives the remainder of the payment and is now
considered paid. This generates the cardholder’s billing statement and accounts
are funded appropriately.

      Interchange fee – the fee charged by card networks and card issuers to the
merchants. This fee is regulated to about 1 to 3 percent of the total purchase
amount and covers the costs associated with credit card acceptance.

      Issuer – the financial institution who issues credit card products to its
customers. Examples of major issuers include Discover, Amex, Visa and

      Using the terms provided above as a guide, here is what takes place during
credit card payment processing:

       Authorization follows this flow:

              The cardholder submits the purchase request to the merchant.
              The merchant submits the purchase request to the acquirer.
              The acquirer sends the request to the card issuer though the card
              The card issuer generates an authorization code for approved
              The card issuer sends the authorization code to the acquirer through
the card network.
              The acquirer gets the same information to the merchant.
              The cardholder gets the purchased product and checks out.
       Batching has two steps and involves the merchant and the acquirer only:
              The merchant reviews all card transactions at the end of the business
              The merchant sends the batch information to the acquirer to receive
the corresponding payment amounts.

       Clearing has these steps involving the acquirer, the card network, and the
card issuer:

              The batch information is sent by the acquirer to the card network.
              The card network sorts the batch and sends requests to the card issuer.

            The card issuer deducts the interchange fee and sends the information
back to the card network.
            The card network sends the information back to the acquirer.
      Funding involves the acquirer and the merchant on the final process:
            The acquirer deducts its discount fee and sends the remaining
payment amount to the merchant.
            The merchant receives the payment in net amount after deductions of
the processing fees.

      The process above lets a cardholder know that for every transaction he
makes, all parties are paid their corresponding costs and payments are processed
and funded. The credit card payment processing is intimidating at first but after
working with the process becomes second nature.

      Knowing how merchant account services work is the key to avoiding
unnecessary penalties and fees.

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