Who are the players involved and what are their roles in the process?
Credit card processing isn't a simple A to B transaction. There are many players involved from the moment a customer's credit card is swiped to the resulting transaction. Understanding the players involved in the process and their roles is one of the key elements to understanding how credit card processing actually works. Even though a credit card transaction seems to happen in an instant, there are many different processes at work between the customer and the merchant.
Let's take a look at each player and their role in the transaction:
- The customer. This is where the process begins. It is their credit card which is swiped to begin the transaction and from their account which the money is taken.
- The merchant. The merchant is another name for the business who is receiving the money from the customer in exchange for goods or services. The money taken from the customer's account will end up in the merchant's account.
- The payment gateway. The payment gateway is the equivalent of a POS (point-of-sale) machine in a brick and mortar store. It is where the transaction begins when the card is swiped or the credit card details are entered on a payment platform.
- The acquiring bank's processor. This is the payment processor used by the merchant's bank to process credit card transactions. Once the transaction passes through the payment gateway it reaches the acquiring bank's processor to be validated.
- The customer's credit card issuer. This is the bank where the customer was issued their credit card. Although credit cards are generally either Visa or MasterCard, they are usually issued by local or national banks. At this stage, the bank where the customer's account is held releases the funds if they are available.
- The merchant's acquiring bank. This is the bank where the merchant holds their account. The money lands here after it has been approved by the customer's credit card issuer.
The Credit Card Processing Stages
The best way to illustrate how credit card processing works and the relevant stages involved is to imagine a real life transaction. Let's assume you are a customer and you are making a purchase for exactly $100 worth of products or services online. Once you have entered the required credit card details and hit the 'submit' or 'pay now' button, your money embarks on a speedy journey through several hands. During this journey up to $3 is taken from the original $100 before it lands in the merchant's account depending on the fees. The fees are determined by a number of factors which occur during the journey, however, we are using $3 as an estimate for this example.
After the customer has clicked the 'submit' or 'pay now' button the first stage of the process is the payment gateway. Here, around 10 cents is taken from the $100 transaction. Once the 10 cents has been taken off, the rest of the money is routed to the appropriate processor which shaves another 8 to 10 cents off the total amount. The processor then moves the transaction along to the credit card interchange where a further approximate 9 cents is taken from the remaining amount. As you can see, there is already a lot happening before the transaction even reaches issuing bank.
Once the transaction moves through the interchange, the next stage is a request made to the issuing bank to see if there are enough funds in the customer's account to complete the transaction. This is where the largest fee is taken off the total amount, approximately $1.93 in our example transaction. If the customer doesn't have enough funds to cover the transaction, the sale is declined at this point and the customer is asked to either add funds to their credit card or use another payment method.
If the funds are available, the transaction continues and moves to the next stage which is a pit stop at the merchant's acquiring bank. Here, the transaction amount is deposited into the merchant's account, minus the fees already taken and a further 65 cents in fees. So, by the time the money reaches the merchant's bank account in this example, the merchant will receive around $97.15 due to the fees. All of this happens in a matter of a few seconds and is quite similar to how credit card processing works when the transaction is face to face. The only difference being that when the transaction is face to face, the terminal where the card is swiped acts as the payment gateway.
The Declined Factor
Part of understanding how credit card processing works is understanding how and why payments are denied. The whole process of credit card transactions is computerized and as such there are 'triggers' in the code which will result in a transaction being denied for reasons other than a lack of funds.
Some of the most common triggers include:
- Unusual spending habits. If the customer doesn't use their card on a regular basis and then out of the blue begins to use it several times a day, this will trigger a signal in the system that someone other than the authorized cardholder is using the card. If this occurs, the card in question will generally be suspended or frozen until the bank can get in touch with the cardholder to confirm they are ones using the card. The reason for this trigger is to help stop fraudulent activity.
- Purchasing 'high fraud' products. There are some purchases which are classified as 'high fraud' products. These include gambling websites, adult entertainment businesses, and travel companies. If purchases are made in these categories, there is a possibility the card will be frozen by the network until the bank can confirm they are genuine purchases.
- Purchases made abroad. This is often a very strong indicator that a credit card has been stolen and is being used fraudulently. If you haven't informed your bank that you are planning to leave the country and then use your credit card abroad it is likely that they will freeze your account until they can confirm it is not fraudulent activity.