How Credit Card Processing Works | Insights | Worldpay (2024)

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The steps of credit and debit card payments processing explained

Business owners and managers tend to also be savvy consumers. That’s understandable since you routinely evaluate the many products and services needed to keep your business running smoothly.

Accepting credit cards enables you to get paid. That means you’ll need to select a credit card processing company. Credit card processors are important partners beyond the core service of processing payments, making it a critical business decision. You don’t need to become an expert, but you’ll be a better consumer if you know how credit card processing works.

To understand how payments processing works, we’ll look at the actors and their roles.

Who are the actors in a credit and debit card transactions?

• A cardholder obtains a credit or debit card from anissuing bank, uses the account to pay for goods or services.
• A merchant is any type of business that accepts card payments in exchange for goods or services.
• A merchant bank establishes and maintains merchant accounts. Merchant banks allow merchants to accept deposits from credit and debit card payments.
• Payment processors are companies that process credit and debit card transactions. Payment processors connect merchants, merchant banks, card networks and others to make card payments possible.
• Issuing banks are the banks, credit unions and other financial institutions that issue debit and credit cards to cardholders through the card associations.
• Card associations include Visa, Mastercard, Discover and American Express. The card associations setinterchange ratesand qualification guidelines, and act as the arbiter betweenissuing banksandacquiring banks among other vital functions.

What does credit card processing look like in motion?

Credit card processing works in three distinct processes:

1. Authorization
2. Settlement
3. Funding

First, let’s look at credit and debit card authorization process.

1. The cardholder presents their card (swipe, tap, insert or other secure method i.e. contactless or by entering number for online credit card payment) to a merchant in exchange for goods or services. The request might originate from a credit card terminal or point of sale system in a brick-and-mortar store, an eCommerce website gateway, through mobile or in-app payment acceptance.
2. The merchant sends a request for payment authorization to their payment processor.
3. The payment processor submits transactions to the appropriate card association, eventually reaching the issuing bank.
4. Authorization requests are made to the issuing bank , including parameters like CVV, AVS validation and expiration date.
5. The issuing bank approves or declines the transaction. Transactions can be declined for insufficient funds or available credit, if the cardholder’s account has been closed or expired, if a payment is past due or other factors.
6. The issuing bank then sends the approval (or denial) status back along the line to the card association, merchant bank and finally to the merchant.

That’s the credit card authorization process in a nutshell. The card authorization process takes only a matter of seconds.

Now let’s look at the credit card settlement and funding process. This part is essentially how the merchant gets paid from the credit cards they accept.

1. Merchantssend batches of authorized transactions to theirpayment processor.
2. Thepayment processorpasses transaction details to the card associations that communicate the appropriate debits with theissuing banksin their network.
3. Theissuing bankcharges thecardholder’saccount for the amount of thetransactions.
4. Theissuing bankthen transfers appropriate funds for the transactions to themerchant bank, minus interchange fees.
5. Themerchant bankdeposits funds into themerchant account.

The settlement and funding processes that used to take days are now almost always handled overnight, helping merchants get paid quickly.

That’s the simplified credit card payment process.

To learn even more about how credit card processing works, connect with one of our payments experts. We’re happy to answer your questions and walk you through the easy setup

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