How credit card payments work

How do Credit Card Payments Work? Take credit cards online.

If you sell to customers you need to accept credit cards. But how do credit cards payments work? What do you need to know to run your business? To accept credit card payments from your online customers you’ll need to know how credit cards work. Don’t worry it’s not a complex process. We have put everything into a summary for you below.

Our goal with this website is to educate businesses of all sized on how to use credit cards to make sales online. Let’s cover some basic things.

[plain](1) How do cards work in an online payment?

(2) How do I (the merchant) get paid?

(3) What are things about the card payment that I should know? [/plain]

If you’re selling online in the US you need to take credit card payments. You won’t make many sales without credit cards. You won’t sell anything at all. Luckily taking credit card payments online is well oiled machine and it’s easy to get started. Let’s explain with the diagram below.How credit card payments work

Your customer starts by making a purchase from your online store. The customer adds a product to a shopping cart. A shopping cart online is nearly the same thing as a shopping cart at a grocery store. Both are a place to collect items for purchase while continuing to shop. When your customer is ready to checkout they click on checkout. The payment process will now begin. Here are the steps:

  1. If your customer does not have a credit card on file with you or your payment gateway, the customer will be asked to add one. This means the customer will also be required to give their name, shipping address and email.
  2. Once this information is collected the customer can click on a submit button and this send the payment to your payment gateway.
  3. Generally websites will send a message over the web to the payment gateway. This is often called an API call, a web call or sending a message. It’s all the same thing. A set of information is sent to the gateway about the purchases.
  4. The payment gateway checks the information it receives to ensure the information is complete.
  5. The payment gateway then sends the information to the payment processor.
  6. The payment processor does a check to make sure the information is complete and then forwards the information to bank that provided the credit card to your customer.
  7. The bank receives information from the payment processor. More importantly, the bank check to make sure the credit card is a good card and not fake. Then the bank checks to see if there is sufficient money that can be reserved on the credit card for the purchase. Sometimes the customer will have been on a massive shopping spree and exceeded the maximum amount on credit card and bank will not allow more purchases. If all of these checks are ok the bank will send an approve message back to the payment processor.
  8. The approve message travels back through the same route to you the ecommerce girl or guy who is trying to make a living.
  9. Whew. That’s a lot of stuff. But it all happens in a second or less.

What else do I (the ecommerce business) need to know?

What we just explained above is the credit card authorization process. This is the biggest part of how credit card payments work. Once you’ve received a successful authorization you need to ship your product to your customer within 48 hours or less. Why 48 hours? This is the recommended time period by the credit card companies. It’s also a courtesy to your customer. If you don’t have the product in stock but sold it on your website anyway, you need to get the product within 48 hours or cancel the order.

You get paid by your payment gateway. Your payment gateway normally pays you anywhere from 2 to 14 days after the transaction. Your payment gateway will require you to setup a merchant account. A merchant account is basically a bank account where you receive your money. Sometimes there are additional fees and charges for having these types of accounts. But the account is basically just a simple bank account.


Get expert advice on how credit card processing works

Accepting credit cards may be as easy as swiping, or dipping, customer cards and receiving the funds in your bank account a few days later, but there is a lot that happens behind the scenes during a credit card transaction. To fully understand how credit card processing works, you need to understand the major players involved in each credit card transaction and what goes into the payment process itself.

  • Cardholder. This is a person who obtains a credit or debit card from a card issuing bank per an agreement/terms of service, and then uses the card to pay for goods or services at merchant locations.
  • Merchant. Any type of business that accepts card payments in return for their goods or services.
  • Acquiring bank. Also known as the merchant bank, the acquiring bank contracts with merchants to establish and maintain merchant accounts that allow the merchant to accept card payments. Note that the acquiring bank may have a processor that performs these functions on their behalf.
  • Issuing bank. These are the banks and credit unions that issue debit and credit cards to cardholders/consumers.
  • Card associations. These are the card brands such as Visa and MasterCard.

The card associations:

  • Act as a clearinghouse for their respective card brand
  • Act as a governing body of payments processing
  • Set interchange rates and qualification guidelines that everyone must follow
  • Act as the arbiter between issuing banks and acquiring banks
  • Maintain and boost their card network and card brand

  • The cardholder presents his or her payment card to the merchant in exchange for goods or services.
  • The merchant sends a batch of approved authorizations (usually at the end of their business day) to their acquiring bank.
  • The acquiring bank reconciles and transmits the batch of authorizations through interchange.
  • The acquiring bank credits the merchant’s bank account via ACH (automated clearinghouse) for card transaction funds (minus interchange.)
  • The acquiring bank debits the merchant’s bank account via ACH for processing fees, either on a daily or monthly basis depending on their services agreement.
  • The card network debits the issuing bank’s account and credits the acquiring bank’s account for the net amount of the authorized transactions (having subtracted out interchange and network fees).
  • The issuing bank pays the acquiring bank for its respective customers’ transactions.
  • The cardholder must pay his or her issuing bank back for transactions plus any accrued interest and fees per the terms of their agreement.

For more detailed information on the process of a credit or debit card transaction, contact a reputable credit card processing company.

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