Credit card processing is the series of actions that must occur to send money from a customer bank account to a business bank account. These actions are carried out by a number of key players, each of which has a defined role in this process.

Credit card processing basics – the key players

There are several integral players to every credit card transaction:

  • Credit card processor
  • Merchant account provided by acquiring bank/acquirer
  • Card network/scheme/association (e.g. Visa, Discover)
  • Card issuer (customer’s credit card provider, e.g. their bank)

The credit card processor communicates the data from the card machine or online store (payment gateway) to the acquirer/merchant account and card network.

The credit card network is simply the brand of the customer’s card, like American Express, Mastercard or Visa. It is the card network that communicates with the card issuer and either blocks or approves the transaction back through the acquirer and credit card processor.

Every player has their part in helping you get paid. Crudely speaking, this happens in two stages: authorization and settlement.

Image: Mobile Transaction

card payment processing diagram

Simplified diagram of how credit card processing works.

Authorizing payments – who does what?

Payment authorizations are essentially one short tram ride, with information as the main passenger. The major stops are the players listed above.

Here’s how that journey plays out:

  • The process begins with the customer when they tap or slot their card into the card reader, or enter their details online through the seller’s ecommerce checkout, thus sharing their payment information.

  • The credit card machine (in person) or payment gateway (online) of the seller sends the transaction information to the payment processor and requests for it to be authorized.

  • The processor sends the request to the credit card network and acquiring bank.

  • The card network sends the request to the customer’s bank.

  • The customer’s bank runs some checks, looking to see if the customer has enough funds and is who they say they are. They then give the thumbs up (or thumbs down) for the transaction.

  • The customer’s bank then sends the outcome of the request back to the seller via the card scheme – the same journey in reverse.

  • When the transaction is authorized, the issuing bank sends the funds to the merchant account where it is temporarily held.

Next comes the fun part – settlement.

Settlement in a nutshell

Despite the fact that the customer has left with their products, and their credit card payment has been authorized, the money hasn’t quite reached the merchant’s bank account yet. This second stage, settling the money, involves some back and forth.

After having left the customer’s bank account, funds are sent to the merchant account where the transaction enters a ‘pending’ period. This happens immediately after the payment has been authorized.

To settle transactions, the credit card processor sends batches of authorized payments to the card scheme that confirms the debit with the card issuing bank. Both the card network and payment processor also communicate with the acquirer in order to move the money from the acquirer’s merchant account to the business’ bank account.

And that’s essentially it – credit card processing in its simplest form.