Payment processing

How Credit Card Processing Works

Whether your customers come to your store in person or shop online, credit card processing follows a relatively similar set of steps. These methods ensure that your customers’ data and funds remain safe from fraud and other breaches. Transactions can be cancelled at each of these steps, so you need to understand how the entire procedure works to ensure that you don’t suffer from excessive credit card declines or chargebacks at a later date.

This post will describe the basic path that a credit card request must take to gain approval and become a transaction. Learning these steps is key to providing your customers with the best service you can.

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What Happens Between You and the Customer

When a shopper tries to pay in person using credit, they interact with a point of sale terminal. Online customers usually input their information into a form on an eCommerce website. In each case, the request must be encrypted to ensure the user’s security. In-person and web transactions use different encryption methods, but the result is often the same. These methods take relevant data, such as a card number, expiry date, amount requested, and more, before sending this information to a credit card processing company. All of this happens in an instant, but the procedure is still regimented to ensure no mistakes are made.

The Request’s Path to the Processor

When the online platform or point of sale terminal makes a request, the data is first sent through a payment gateway. While the request is initially encrypted, the gateway provides an extra layer of security. It ensures that the information is sent over a secure connection, further eliminating any chance of disruption or fraud.

When the gateway routes the transaction, it goes through to the payment processor. These companies act as intermediaries between a business and issuing banks or credit card associations. They ensure that requests flow properly to the relevant bank, that approvals go back through the pipeline to the buyer, and that the merchant’s account eventually gets credited for the amount sold.

The Processor’s Appeal to the Card Association or Issuing Bank

Once the processor receives the request through the payment gateway, it moves on to another organization. If the customer uses a debit card, the plea goes right to their issuing bank. For credit card transactions, another step is taken, with a credit card association receiving the transaction details before sending them off to an issuing bank.

Approval or Rejection

When either the credit card association or the issuing bank receives the request, they will either approve or decline it. They will approve a transaction if the customer’s card details are in order (e.g. the card is not expired, there has been no misconduct, etc.) and if the balance on the user’s account can cover the amount requested. Once this happens, the organization will send either their approval or rejection back through the chain, so both the payment processor and the merchant’s terminal will be notified of the transaction’s status.

The Effect on a Merchant Account

Both approvals and declines can have an effect on a merchant’s account. If the credit card company approves a purchase, it will become part of a “batch,” a group of approved transactions that a business must send back in order to receive payment. When a credit card company receives these batches, they send the debited amount to the payment processor, which reroutes it to a merchant account in turn. Meanwhile, individual declines may seem harmless, but if they accumulate, a business may be labelled a risky prospect for payment processors. A customer can also challenge a transaction on their account, and if it’s successful, it results in a chargeback and the payment processor removes the amount debited from the merchant’s account.


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Ben Smith

Ben brings 20 years of experience to his role as IT Director for BNA Smart Payment Systems. Among his many directorial duties, he is responsible for the selection, acquisition, development, installation, maintenance, and support of IT infrastructure. Ben also establishes and leads a cross-functional architectural committee, acts as a technical expert and a critical technical resource across multiple disciplines, and consults on all system implementation, modification and integration activities. He graduated with Honours from Durham Collage in Computer Programming, and takes yearly training courses for security and development technologies to remain up-to-date. Outside of work, he loves playing hockey and skating with his family, and also enjoys gardening and cooking.

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