How Credit Card Processing Works For You

Credit card processing is an event that occurs between a consumer and a merchant involving the use of a credit card and the purchase of a good or service. Here is a basic guide to what credit card processing is, and how it works for you.

The Basic Process

When a consumer, like you, shops at a store or online, they can simply and quickly pay for their purchase using a credit card. Instantly, the credit card is charged.  While it may seem simple from the outside looking in, there are actually a number of processes that are going on behind the scenes.

Behind the Scenes

In the world of credit card processing, the consumer is known as the Cardholder. They have a credit card from a bank, which is known as the Issuing Bank. The issuing bank is nothing more than the bank that the Cardholder decided to request a credit card or bank card from. The store or shop that accepts the credit card payment is known as the Merchant. The merchant has a bank account known as a Merchant Account that allows them to accept payments by credit card.

The Merchant Bank is the bank that will receive the Net Settlement Amount from your credit card's Issuing Bank once the credit card transaction has been processed. What the Net Settlement Amount is, is the actual sale amount sans any fees associated with the transaction. Some merchants are required to pay fees associated with accepting credit card transactions.

Credit Card Processing Steps

When the magnetic stripe on your credit card is run through a credit card terminal, the process begins. Your information is entered automatically into the system, and a request for authorization is generated. The issuing bank will verify that your credit card number is valid and that there are sufficient funds in your account to accommodate the transaction. A "hold" for the amount of the transaction is then placed on your account.

Once the approval has been received, a deposit transaction request is transmitted that completes and finalizes the transaction, allowing the merchant to release whatever items were purchased on the behalf o the cardholder. Then the net settlement amount, the amount minus any transaction fees, is deposited into the account belonging to the merchant by the end of the business day.

Credit Card Processing Problems

There are situations, where things do not go quite as planned. For example, if there are insufficient funds available on your credit card, then the hold cannot be placed and the payment cannot go through. If this is the case, the transaction will be declined on the merchant's end, and you will not be able to purchase the items or services requested.

Although there are instances where a transaction will go through even if sufficient funds are not present, it is preferable for the transaction to be declined because over drafting your credit card account will result in fees to you.

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