3-2 How Credit Card Processing Operates

How Merchant Accounts Function

Think of the most complicated thing possible, and now picture it ten times worse. Welcome to electronic processing via ACH. All kidding aside, there are a lot of complicated things that happen from the time that you charge a customer's credit card to when it is authorized. The process requires multiple financial institutions and electronic transfer systems to deliver the final product.

While this is all very interesting and the Merchant Council will be releasing a guide very shortly that explains the whole process in grueling detail; it is not necessary for you to know most of this stuff in order to acquire and maintain the best merchant account for your business. Instead, we have described the basics flow of an electronic bank card transaction process below.

When you run a customer's credit card through your terminal, the following process takes place:

1. Your terminal, software, or gateway contacts your credit card processor (referred to as a third-party processor ), or your acquiring bank, with the customer's credit card and billing information along with the transaction information such as the amount of the sale.

2. The processor or bank then relays the information to the issuing bank or card-issuing organization. This is the place where the customer's credit card comes from. MBNA, Citi Bank, and Bank of America are large credit card issuers.

3. The issuing bank then sends an approval or decline back to the third-party processor based on a number of different criteria such as available balance, validity of the information supplied, etc.

4. Once the approval (or decline) is confirmed by the issuing bank, an authorization is issued against the customer's credit balance. This means that the funds in question have been reserved for the sale.

5. The transaction is then assigned an authorization number which is a code that identifies the individual transaction.

6. This information is relayed back to your credit card equipment and displayed for your records so that you know the credit card has been approved.

7. This and any other authorizations that accumulate over a business day are then stored by your credit card equipment in something called a batch. Batches are very important and will be discussed in more detail in the next section.

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