While it may just be a swipe, a quick signature, and an approval at the transaction register, the procedure behind completing a credit card transaction is a long and detailed process.

Key Players

There are four different parties in the picture for every credit card transaction:

  • cardholder
  • merchant
  • acquirer
  • issuer

The acquirer is the merchant’s bank that processes the transaction and is a registered member of the card associations (such as Visa or MasterCard). The issuer is the cardholder’s bank that processes the transaction (such as Chase, Capital One, Citi, etc.) and is also registered with the card associations—which is how someone can get a Visa card issued by Chase bank).

Step One: Authorization

In the moments immediately after the credit card is swiped and read by the machine, a series of actions authorize the transaction.

First, the cardholder requests a purchase from the merchant—this is the first act of swiping the credit card (or entering in the credit card number manually).

Then, the merchant submits the request to the acquirer (Visa or MasterCard), which then sends a request to the issuer (Chase, Capital One, etc.) to authorize the transaction. This is when the message pops up on the credit card reader: “Payment OK?” Once the transaction is approved, an authorization code is sent to the merchant’s bank (Visa, MasterCard, etc.) and is quickly approved. Voilà—the transaction is complete and the customer happily leaves the store with their product.

Step Two: Batching

At the end of the workday, the merchant sends all copies of authorized transactions to the acquirer to receive payment.

Step Three: Clearing

The batch is sent through the card’s network—think MasterCard or Visa—to request payment from the issuer. The card network then distributes each transaction to the appropriate issuer (Chase, Capital One, Citi, etc.). The issuer subtracts the interchange fees (a charge the merchants pay to the credit card issuer as a fee for accepting credit cards) of about 1 to 3 percent before transferring the amount back to the acquirer.

Credit card fees

Because of the complicated process for a credit card transaction, many merchants, acquirers, and issuers have to pay at least some portion of the many credit card fees. For Visa cards, for example, the fees often include a .13% credit assessment, a $0.0195 Acquirer Processing Fee (APF), a $0.10 Transaction Integrity Fee (TIF), and for international purchases, a .45% international acquirer fee. Out of a $100 transaction, for example, a merchant can expect to receive about $97.80, the issuer receives about $1.70 in fees (before receiving the cardholder’s payment due to them), and the acquirer receives about $0.50.

Step Four: Funding

Once the funds reach the acquirer, the acquirer subtracts the discount fee (the processing fee to cover the cost of processing credit cards) and pays the merchant the remainder. The cardholder is then billed directly from the issuer (Chase, Capital One, etc.).

These are the basic steps to processing credit card transactions. Hope you found this post helpful!

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