How does a credit card transaction work?

You enter the store. You are buying something. You swipe or insert your credit card into the payment terminal and you’re done. But have you ever wondered what goes on behind the scenes of a credit card transaction?

This is a whole process involving you, the seller, the payment system, the acquirer and the issuing bank. Here’s how a credit card transaction works.

What is a credit card transaction?

A credit card transaction occurs when someone uses a credit card at a payment terminal or merchant portal. This could be pasting, tapping, or swiping in a common place like the grocery store, or entering your credit card number online or over the phone. The payment is processed and then approved or rejected within minutes.

How credit card transactions work

There are many steps involved in a credit card transaction. Here are the roles played by the cardholder, merchant, payment processor, acquiring bank and issuing bank:

Consumer

Your role in the credit card transaction process is simple: you simply swipe, insert, or swipe your card at the point of sale terminal, get approved, sign on the dotted line, get a receipt, and walk away with your purchase.

Dealer

As soon as you present your credit card to the payment terminal, the merchant’s bank, also known as the acquiring bank, is contacted to confirm the purchase. The merchant bank then receives authorization for your purchase on your credit card network, such as Visa or Mastercard.

The payment network then communicates electronically with the credit card issuer, also known as the issuing bank, where the cardholder’s account resides, to verify that the card is valid and has sufficient funds to cover your purchase.

Note. If your network is American Express or Discover, they act as the issuer and payment network and make their own claims.

If everything is in order and you have enough credit available, the issuing bank sends the verified information back through the credit card network to the acquiring bank, and the merchant receives it to complete the payment.

The customer then signs the receipt, but the salesperson has not yet been paid.

When the store closes, the merchant sends a list of all credit card transactions for the day to their bank, which is known as batch processing, and the bank then routes the transactions to the correct payment processor for the merchant’s account to receive a deposit.

Payment system

Think of credit card processors as the link between merchants and financial institutions. The payment processor authorizes credit card transactions and pays the merchant by transferring the funds.

Popular payment processing companies like PayPal, Stripe, and Squarespace Commerce take credit card information for every transaction and send it down the line, then receive it at the end of the process for businesses.

Acquiring bank

Acquirer is another name for the seller’s bank and arranges for credit card payments to be transferred to the seller’s account. Sometimes the acquirer and the credit card processor are the same. For example, if a merchant has an American Express business account to accept payments and uses American Express as a credit card processor, then Amex is acting as the acquiring bank and processing company.

Issuing bank

The bank that issued your credit card is responsible for sending the merchant an authorization code for your transaction. To confirm the purchase, the issuing bank receives your credit card number and expiration date, your billing address, your card’s CVV code, and the payment amount.

The bank either approves or rejects your purchase. If your purchase is approved, the issuing bank will take an exchange fee, which it shares with the credit card network. He then transfers the funds, usually within one to three days.

If your card is declined, the merchant won’t be able to tell you why, so it’s important that you contact your issuer immediately to find out why.

How long do credit card transactions take

At the end of a credit card transaction, you sign up for a purchase and leave the store, but the payment for your purchase was only authorized and not delivered to the merchant.

Often, if you view your account online or through your issuer’s app, an authorized purchase may immediately show up as a pending payment rather than a completed payment, and will be deducted from your available credit. In some cases, it takes several days for the charge to appear.

If you dine in a restaurant, you may only see the expected deduction of the total amount before the tip. Once the tip is entered into the system and the transaction is complete, you should see the final payment with the tip included in your account.

Is it possible to reject an incomplete transaction?

After your account is expected to be debited, it can remain there for several days in case the seller cancels or changes it, for example, if an approved tip is added. But for all intents and purposes, a bank cannot reject a pending transaction unless the merchant sends it a message that it will not collect the pending funds.

Credit card processing fee

Merchants must pay to accept credit card payments and fees vary. These fees include a seller’s rebate fee, which is typically 2 to 3 percent of the total purchase price of a transaction.

The merchant fee also includes an exchange fee, or percentage, which is deducted from each card transaction and paid to the issuing bank, as well as a valuation fee—or “swipe fee”—which consists of a percentage of the total monthly sales of each brand of credit card and goes to issuers.

Exchange and assessment fees account for approximately 75 to 80 percent of processing costs. The rest of the processing fees include 20 to 25 percent mark-ups that acquiring banks and processors typically charge to cover transaction costs and generate profits.

bottom line

You now have a working knowledge of what happens every time you swipe a card and the fees associated with credit card transactions. While you certainly don’t need to be an expert on how credit card transactions work, it can be helpful to understand the complicated process and all the fees that go into the price you end up paying at the checkout.