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Nicki Burnham
Nicki Burnham
Consult businesses on strategies to streamline their payment processing.
Published Jun 15, 2022
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Making a purchase using a credit card starts a complicated process where data is sent from the customer's credit card to the merchant's (business taking the payment) Point-of-Sale (POS) device, and then to the cardholder's bank - all in the span of a few seconds. In fact, swiping or tapping a credit or debit card and signing the receipt are just the first and final steps of credit card processing.
Below is a simple breakdown for the 3 stages in the process.
1. Payment Authorization
The first stage of any credit card transaction is payment.
The merchant's credit card terminal or website sends the cardholder's details, including the credit card number, expiration date, security code, and payment amount to the store's acquiring bank or processor. This information is forwarded to the appropriate credit card network (Visa/ Mastercard/Discover/American Express), which then passes it on to the customer's issuing bank for authentication.
2. Payment Authentication
The issuing bank (examples: Wells Fargo, Chase, Bank of America ect.) receives the payment request and verifies whether the cardholder has the available balance to make the purchase. The bank will also conduct security measures to authenticate the cardholder's details and determine whether the transaction shows any signs of fraudulent activity.
If everything is confirmed to be genuine, the bank account approves the transaction and communicates this to the payment processor and then to the credit card reader or terminal.
3. Clearing
The clearing stage is when details of the transaction are sent to the cardholder and merchant services in the form of statements. At the end of every business day, the merchant sends a batch of approved credit and debit card transactions to the acquiring bank or processor.
The card processing company then forwards details of each transaction to the corresponding credit card network, which then forwards it to the appropriate card-issuing bank. Funds and shares of transaction fees are moved between banks, credit card networks, and acquiring processors to keep the system running.
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