Credit card processing involves several components that work together. Here is an overview of the main players involved:
Cardholder
The cardholder is the customer who owns a credit card issued by a bank or financial institution.
Merchant
The merchant is the business or individual that sells goods or services and accepts credit card payments.
Acquiring bank
The acquiring bank, or acquirer, is the financial institution that partners with the business to process credit card transactions. The acquiring bank receives transaction information from the business and communicates with the issuing bank to obtain authorization.
Issuing bank
The issuing bank, or issuer, is the bank or financial institution that issues the credit card to the cardholder. The issuing bank approves or declines transactions based on factors such as the cardholder’s available credit and account status.
Card networks
Card networks are organizations—such as Visa, Mastercard, American Express, and Discover—that provide the infrastructure and rules for processing credit card transactions. Card networks act as intermediaries between acquiring banks and issuing banks to facilitate transaction communication, authorization, and settlement.
Payment gateway
A payment gateway is a tool that transmits payment information from the business’s point-of-sale (POS) system or ecommerce platform to the acquiring bank for processing. It encrypts the cardholder’s data and ensures the transaction complies with security standards.
Payment processor
A payment processor, or payment processing provider, is a company that manages the transaction process on behalf of the acquiring bank, handling tasks such as communicating with payment networks, obtaining authorization, and managing the settlement process.
POS system
A POS system is the hardware and software businesses use to accept credit card payments. For in-person payments, this might include a card reader or a retail terminal. For online transactions, this would include the ecommerce platform and payment gateway.
These parties ensure that credit card transactions are secure and efficient and comply with regulations and industry standards, providing an easy and fast payment experience for customers and businesses.
How credit card processing works
Credit card processing includes a series of steps that give businesses the ability to accept credit card payments and process those payments. Here’s an overview of the process:
1. Transaction initiation
The customer provides their credit card information to the business, either by swiping, inserting, or tapping their card at a POS terminal or by entering their card details on an ecommerce website or mobile app.
2. Authorization request
The payment gateway securely transmits the payment information, encrypting the data before sending it to the business’s acquiring bank. The acquiring bank forwards the transaction details to the appropriate payment network to start the authorization process.
3. Transaction authorization
The payment network routes the transaction to the issuing bank, which verifies the cardholder’s account, checks for available credit or funds, and assesses the risk associated with the transaction. Based on these factors, the issuing bank either approves or declines the transaction.
4. Authorization response
The issuing bank sends the authorization response—either an approval or a decline code—to the payment network, which forwards it to the acquiring bank. The acquiring bank relays the response to the payment gateway, which ultimately passes it on to the business’s POS system. At this point, the business receives the approval or decline message.
5. Transaction completion
If the transaction is approved, the business provides the goods or services to the customer. The approved transaction is added to a batch of other transactions awaiting settlement.
6. Settlement
At the end of each day or another predefined period, the business submits the batch of approved transactions to the acquiring bank. The acquiring bank requests funds from the issuing bank through the payment network. The issuing bank transfers the required funds to the acquiring bank, which deposits the money into the business’s account, minus any fees associated with credit card processing. Typically, authorization takes a few seconds and settlement takes as little as 24 hrs to a few days to hit your bank account.