As consumers, we are often comfortable not knowing the intricate process that goes on behind a simple card swipe. We have a lot of trust in the system. As business owners, it is not so simple. We need a thorough explanation of credit card processing because our businesses rely on the system and the players involved. The more transparent and intelligent the system is, the more we trust it. Read on to learn more about credit card processing; what’s involved and who manages the pieces in motion.
Who’s Who in Credit Card Processing
Before we get into the nitty-gritty of the step-by-step process involved in a simple purchase, we should introduce the players at work. Hello, my name is…
Cardholder – This first one is easy because the introduction is in the name. The cardholder is the customer who holds the card used in the purchase.
Cardholder Bank (Issuing Bank) – The cardholder’s bank is often called the issuing bank because they are the bank that issued the cardholder’s…well…card. They are also the bank issuing the payment. These banks are registered members of card associations, which will be discussed in a moment.
Merchant – A merchant is a business owner who is able to accept credit and debit cards because they have a merchant account.
Merchant Bank (Acquiring Bank) – The merchant’s bank is often called the acquiring bank because they are the bank acquiring the payment. Some of the most well-known merchant banks include Wells Fargo and Bank of America. Just like cardholder banks, these banks are registered members of card associations.
Credit Card Processor (ISO/MSP) – The credit card processor has a relationship with the merchant’s bank and deposits funds from the credit card sale into the merchant’s bank account. A credit card processor can be either an ISO (Independent Sales Organization) or MSP (Merchant Service Provider), like Cornerstone Credit Services. There is no substantial difference between the two. They both provide merchants with the software and equipment to handle credit card processing, ensure compliance with the Payment Card Industry Data Security Standard (PCI DSS), and provide customer service to merchants when they need assistance. That being said, it is very important to hire a credit card processor based in the same country as your business, preferably locally. Local credit card processing companies will ensure that local regulations are met and can provide customer service more quickly than remote providers.
Card Association – The card association is the clearinghouse for card brands and the governing authority over payment processing. Card associations set fees such as interchange and assessment fees, they set qualification guidelines, and they are the arbiter between issuing and acquiring banks. Some of the most well-known card associations include Visa and Mastercard.
How Credit Card Processing Works
Credit card processing happens in two steps–authorization and settlement.
Step 1: Authorization
Authorization happens in a matter of seconds, while the customer is in the store checking out. Here’s how it goes:
- The cardholder gives the card to the merchant.
- The merchant uses their point-of-sale (POS) system to request payment authorization from their credit card processor.
- The credit card processor submits the transaction information to the card association.
- The card association passes the information along to the issuing bank.
- The issuing bank approves or denies the transaction.
- The issuing bank sends this information back to the card association.
- The card association sends the information back to the credit card processor.
- The credit card processor sends the information back to the merchant.
- The merchant tells the cardholder that their transaction has been approved.
Step 2: Settlement (and Funding)
The settlement process follows a similar flow, but it happens hours later, after the sale has been authorized and the customer has probably left the store. Batches of authorized transactions are sent to the merchant’s credit card processor who passes them along to the card association. The card association communicates this information to the issuing bank which transfers funds to the merchant bank which then deposits the funds into the merchant’s account.
Credit card processing is really rather simple; the players are easy to define and the process is easy to understand. Next time you swipe a card, whether on the consumer side or on that of the business owner, remember all of the parties at work in making that simple action a success! If your business is in need of a credit card processing company to partner with you in the ability to accept credit and debit card payments, reach out to us at Cornerstone Credit Services. We are a local company with our feet on the ground, ready to provide you with great services.