Credit cards have become indispensable tools of our financial lives. As credit cards have entered the public consciousness, more and more people have started realizing their benefits. Once considered a luxury made only for the rich, credit cards are now embraced by individuals from many sections of society. Additionally, we have a multitude of credit card designed for different kinds of users. Uses should have complete awareness about stages of credit card processing and their benefits also.
For example, an individual who does not have a credit history can apply for a secured credit card. A secured credit card is typically backed by a payment that is used as collateral. Credit card issuers such as banks offer secured credit card to their customers to help them build their credit profiles. Once you have a credit card, you can use it to pay for any kind of goods and services both online and offline. You can use your credit card to make payments at retail outlets, restaurants and supermarkets. When you make a purchase and swipe your credit card or enter its information online, credit card processing occurs immediately before the purchase is approved. In this article, we will understand the inner workings of credit card processing and what it entails.
While it only takes a few seconds for credit card processing, there are several steps involved in it. Let us understand the three stages of credit card processing.
The card details and amount of purchase have to be verified and authorised by the issuing bank. The message for transaction approval or transaction denial appears on the card machine after the cardholder enters the card details.
- The first step is when the cardholder inserts, taps or swipes their credit card into the merchant’s credit card machine in order to complete a purchase. In case of making a purchase online, they enter the card number on the website/application.
- The merchant’s card machine transmits the card details and transaction information to the acquiring bank through the phone line or internet.
- On receiving the information, the acquiring bank sends it on to the relevant card network (Visa or Rupay).
- Then the card network relays the information to the issuing bank of the cardholder.
The second step is payment authentication.
- When the issuing bank obtains the information, it verifies the card details such as the credit card number and CVV number to ensure that the transaction is authentic. In addition, the bank checks whether the cardholder has sufficient credit remaining to complete the transaction. In the case of secured credit cards, the credit limit is based on the collateral amount paid by the cardholder to the card issuer.
- The issuer then transmits a response back through the card network to the acquiring bank. The merchant’s card machine or terminal receives the response and verifies the credentials. If everything checks out, the transaction is approved. If there is a problem with any of the above issues, the machine shows a message which says “transaction declined/denied” The cardholder can immediately get the status of the transaction and thus, the credit card processing takes place.
Clearing and Settlement
Clearing and settlement is one of the third stages of credit card processing, which takes place among the merchant, acquiring bank, card network, and the issuing bank. Every credit card transaction is registered in the merchant’s payment system. A merchant transmits a batch of authorized transactions to the acquiring bank every business day. The acquiring bank confirms every authorization and transfers the batch to the relevant issuing bank via the card network. The acquiring bank then deposits the money due to the merchant into the merchant’s bank account and deducts processing fees.
The issuing bank makes the payment to the acquiring bank via the card network. When a cardholder checks their spending activity online, they may see their recent charges move from “pending” to “posted” on their account. The settlement process typically takes 1-3 business days. The cardholder consequently pays their issuing bank what they owe for all their purchases including any fees or interest charged as per the credit card terms.
Since card networks and acquiring banks charge merchants a processing fee for credit card transactions, some merchants can charge the same to their customers. Some merchants may even increase the price of the products to cover the processing fees paid by them.