Payments 101 – What is Credit Card Processing?
Credit card processing involves several key players and a number of steps before the correct amount is delivered to you, the merchant. The below walks you through how the information you collect from your customers eventually delivers money into your bank account.
Overview of the Process
There are three main processes that ensure a successful sale.
- The first is called authorization. During this process it is confirmed that the credit card is valid and has sufficient credit to purchase goods or services.
- The next process is called settlement. Here the electronic payment transactions are managed so they can clear and be funded.
- The final stage of a successful credit card processing transaction is funding. Here the processor deposits money into your bank account to compensate you for the transactions processed.
The Key Players
There are five key players that have a role in the process. They are:
The customer or card holder: Typically this is the individual who actually buys goods or services from a business, but it can also refer to an individual authorized to use the card to make a purchase.
The merchant: The legal entity authorized to accept the card for the goods sold or services rendered by the business.
The processor: The merchant service provider that sends the details of the processing card transaction among the merchant, bank, and card issuers.
The card payment brand: A consumer payment system with financial institution members who issue payment cards and sign the merchants to accept these cards. Common brands include Visa®, Mastercard®, and American Express®.
The card issuer: The financial institution that issues payment cards and maintains a contract with the cardholder for repayment.
You can obtain authorizations through options such as a point-of-sale terminal, virtual terminal, smartphone swiper, e-commerce website, or over the phone. Generally, the entire process occurs within a matter of seconds and follows these steps:
- First, depending on how you run the card, the information is transmitted to a processor.
- Next the processor forwards your request to the card payment brand, such as Visa® or Mastercard®.
- From there, the payment brand sends your request to the card issuer (the bank that issued the card to the customer).
- The issuer will then approve or decline the transaction, and sends this response back to the card payment brand. Next the card payment brand sends the response to the processor.
- The processor then forwards this response to you so you can complete the transaction.
- The card will then be approved, declined, or “referred” for the purchase.
- An approval means that the dollar amount you specified will be reserved from the cardholder’s available credit limit for future settlement.
- A decline means that the customer’s card cannot be used to complete the purchase.
If you receive a decline notification, be aware that it may be for one of any number of reasons—perhaps the cardholder has spent more than their credit limit, or the credit card has been reported lost or stolen.
It is not your responsibility to explain to the cardholder why their card was declined—the actual reason for the decline notification is not transmitted to you. If a customer requests more information about the denial, direct them to the customer service contact information on the back of the credit card.
A referral is a request for additional information before an authorization can be issued. This request can be for information from either the merchant or the cardholder. An issuer may send a referral response as a security measure.
If a referral is received, the processor will contact the issuer directly and request authorization on your behalf. The issuer may request to speak with you or the cardholder over the phone to confirm the legitimacy of the transaction before the issuing the authorization.
Referrals are sometimes requested when a cardholder is trying to make a purchase in a foreign country. Other instances include when a cardholder is using their card more than usual in a short period of time or has reached the credit limit on the card.
Settlement is the process of managing electronic payment transactions so they can clear and be funded. Depending on your business, your customer likely considers the sale complete once they have left your store, logged off your website, or hung up the phone. For you, however, the transaction is still in process, since it must now be settled.
To make this happen, the approved card transaction must be presented to the processor. The processor then submits those approved transactions to the payment brands for clearing through interchange. You may hear these transactions referred to as “deposit” transactions.
The settlement process typically goes as follows:
- Typically, your terminal or point of sale device automatically triggers, or “batches” a settlement, unless further steps are required – such as tip adjustment in a restaurant.
- The processor then forwards your settlement request to the appropriate credit card payment brand for confirmation with the cardholder’s issuing bank.
- The payment brand receives the settlement request and does two things. First, issuing a credit to the processor to reimburse you for the amount of the settled transaction.
The issuer then pays the processor for the transaction.
- After that the payment brand issues a debit to the card issuer to charge for the settled transaction.
- The issuer then posts the transaction to the customer or cardholder’s account. At the end of the billing period, the issuer sends the cardholder his or her monthly statement.
- The cardholder receives his or her credit card statement and pays the bill to the card issuer.
Interchange fees are fees that a merchant acquirer or merchant services provider pays to card-issuing banks. The interchange category under which any single transaction falls will depend on various factors.
The processing environment of the business: The location of card processing is just one of the factors in determining the fees applied against the transaction. Card issuers consider purchases that occur in physical stores as less risky than those made online or over the phone, and fees are adjusted accordingly.
The merchant’s card acceptance method: Retail locations that physically swipe cards through their processing equipment are charged lower fees than those that type or “key in” the information.
Security information sent along with the transaction: When the card information is collected, a merchant can also collect additional data points to help decrease the risk associated with the transaction. Getting the cardholder’s address and/or zip code as part of an Address Verification System (AVS) can help assure the card issuer that an authorized cardholder is using the card, rather than a third party for a fraudulent purchase.
The card brand and type: A massive number of interchange rates exist among card brands and transaction types. Each card has its own associated rates, which vary based on the previously noted factors. The highest rates are often associated with corporate and rewards cards, as the card issuers leverage the higher fees on these cards to finance the rewards and offers that the cardholders receive. The lowest rates are historically associated with debit cards.
The final part of the process is funding, when the processor deposits money into your bank account to compensate you for transactions processed.
The funding process is really an extension of settlement, and sometimes the terms “settlement,” “batching,” and “funding” are used interchangeably regarding this process. Funding happens when the payment brands, such as Visa® or MasterCard®, reimburse the processor for your customer transaction, allowing them to send these funds to you.
Generally, merchants receive their funds within one to two business days. However, it is important to note that funding does not occur on weekends or on certain holidays, particularly federal banking holidays.are
What is B2B? Business to Business are transactions that typically occur between two businesses and are transactions made using Business, Corporate and/or Purchasing cards. These card types may qualify for a lower interchange rate so long as additional requirements are met, or what is referred to as Level II or Level III data is passed along with the transaction. The biggest benefit is seen by Merchants processing in a card-not-present environment, but NCCP Group’s B2B App can also assist with card-present Merchants.
What is Level II & III Data and which Card Brands participate in B2B? Level II and III data consists of transaction details such as tax amount, unit of cost, product code, just to name a few. However it’s important to remember the transaction settlement time and the Merchant’s MCC/SIC code assigned are also qualifiers. American Express and Discover do not participate in these programs.
Who uses B2B? Typically, Merchants creating Invoices or Recurring Billing contracts, or any Merchant processing transactions in a B2B environment will benefit from the B2B App.
Why use the B2B App? Merchants may receive a reduction in Interchange rates on Business, Corporate or Government payments as well as Large Ticket sales on Commercial cards.
How do I setup a Merchant with B2B? Within MX ISO Agent, the B2B App may be activated during boarding for a Merchant within the MX Merchant tab or by reviewing an existing Merchant via All Merchants. Standard rates are preloaded at the MX Portfolio level but may be changed as a whole by speaking with your RM. Any App may be changed at time of activation to specific desired cost. A Trial Period may also be set in which no billing will occur. Merchants may also activate the App on their own by viewing Apps within MX Merchant. This is why it’s so important to ensure pricing is predetermined for your Merchants.