Credit Card Processing

Credit card processing is a complex series of electronic events that accomplishes the secure, successful transfer of funds from a bank to a merchant in payment for goods and services purchased by a valid credit card holder.

People buy goods and services all around the world, 24 hours every day, seven days a week. Literally billions of transactions amounting to trillions of dollars are handled by merchants and banks, and the numbers are constantly increasing. Every time a business or individual buys something with his card, a prescribed set of electronic mechanisms ensure that the transaction is processed to everyone’s satisfaction.

A merchant account empowers a store, website, mail order company, gas station or any other business to accept credit cards for payment. Without a merchant account, businesses can only accept cash, checks or some agreed-upon barter in exchange for whatever goods and services they are selling. However, studies have shown that by opening a merchant account and accepting credit cards, businesses can vastly increase their customer base, thus adding to their bottom line.

Merchant account give businesses the tools they need to accept credit cards and initiate the processing transaction. For retail merchants, this means some sort of electronic device to scan the card on checkout. For websites, it means the ability to process the transaction with the information entered by the customer on the checkout page. And for mail order companies, it means processing the transaction from the information given over the phone or sent through the mail by the customer.

The moment that a card is scanned or its information is entered into the merchant’s computer program, the first part of the process, security, begins. The first responsibility of the merchant is the verification of the card. Addresses, zip codes and CVV codes – Card Verification Value codes, three-digit numbers on the back of most credit and debit cards – are necessary to validate that credit cards are not missing or stolen.

Assuming the card is valid, the information is then sent to the credit card issuing bank for verification. At this point in the transaction other factors weigh on the process. For example, if the card is over its credit limit, the transaction may or may not be voided by the issuing bank – there are reasons why administrative decisions may override an automatic void. If the information submitted with the purchase is correct, an approval code is created by the issuing bank and sent back to the merchant.

When the merchant receives the approval he gets the customer to sign a receipt and hands over the merchandise. If the transaction occurred on the Internet or over the phone, the customer is notified of the approval and the merchandise is scheduled for delivery.

There are still several vital parts of the transaction to be concluded. First, the merchant must receive his funds, so the credit card issuing bank will follow the approval with a transfer of funds into the merchant’s designated account, less the fees associated with the transaction.

The final step for credit card holders, even after receiving their merchandise, is when they receive their bill for the goods or services purchased. This amount will then have to be paid, along with any associated interest charges if the balance is paid off over time.

In addition to the merchant’s normal fees for credit card processing, there is also something called a “chargeback hold” that may affect a portion of the funds. If the merchant is due a payment of $100 he most likely will receive approximately $75 to $80 instead of the total. The remaining funds are held in a separate escrow account at the issuing bank, for a period of up to six months, for the purpose of protecting it from valid cardholder chargebacks.

Chargebacks occur when the cardholder is not satisfied with the goods or services he purchased and contacts the credit card company to dispute the charge. Often the cardholder would like to return the merchandise for a full credit. The amount of the chargeback is deducted from the escrow account which is released to the merchant months after the transaction occurred. A large number of chargebacks will result in the merchant account being closed.

Because it usually happens quite smoothly, and at the speed of light, credit card processing may appear to be quite simple. However, a lot of electronic and human elements make it a very complex undertaking. The complexity in fact, is in the service of security, for everyone involved. The merchant, the card holder and the issuing banks are all protected by this precisely orchestrated series of events that takes place after your card is swiped. With all of these built-in security protections, a smooth transaction is completed in a matter of a few seconds – over and over, millions of times every hour of every day, all around the world.