Comprehensive Guide to Credit Card Processing

Whether you are an offline or online merchant, you probably deal with credit cards daily. While many merchants disregard the complex algorithm that launches after the client clicks the “Pay” button, it is best to know how it works.

Payment Processing: What Does This Term Mean?

Payment processing is a series of operations required for a credit card transaction initiated online, in-person, over the phone, or through mail to be completed. It occurs behind the scenes every time a consumer attempts a purchase.

Card Payment Processing: How It Works

These days, most trade activities involve credit card purchases at land-based and online stores. But how do credit card transactions work? To understand this process, it is vital to know which entities participate in it.

Parties Involved in Credit Card Processing

Payment Processing: What Is the Meaning Behind This Term?

Payment processing is a series of operations required for a credit card transaction initiated online, in-person, over the phone, or via mail to be completed. This process occurs behind the scenes every time a consumer attempts a purchase and is facilitated by multiple entities.

Parties Involved in Credit Card Processing

Behind a seemingly simple purchasing process, there is a more complex network of many cooperating parties, such as:

• The cardholder - the cardmember making the purchase and transferring funds to the business account.
• The issuing bank - the cardholder’s bank.
• The merchant - the seller providing the product or service and receiving funds on their business account in return.
• The acquiring bank - the merchant’s bank providing their business account.
• The payment gateway - the intermediary technology between the merchant’s business account and the payment processor that collects essential data and returns the transaction’s approval or rejection.
• The payment processor - the company that processes credit and debit card transactions for the merchant. Payment processors connect the issuing bank, merchant, and card networks (like Visa or Mastercard).

The card network (card association) mentioned above is the last puzzle piece that makes the credit card processing algorithm complete. It acts as the transactions’ facilitator by creating virtual payment infrastructures.

The major globally renowned credit card networks are:

• Visa
• Mastercard
• American Express
• Discover
• JCB
• China UnionPay

Apart from aiding the transaction flow, a credit card network like Visa or Mastercard regulates which cards a certain merchant deals with. However, the acceptance rates of the major card networks are fairly similar, boasting more than 10 million locations.

Now, let’s move on to exploring the key credit card processing stages.

Main Stages of Credit and Debit Card Processing

So what is a credit and debit card processing system, and what stages does it consist of? Here is what happens during card transaction settlement:

1. The customer initiates an order and enters the issuing bank’s card data on the merchant’s website.
2. The merchant collects the information about the order and sends it to the card processor.
3. The card processor forwards the transaction information to the credit card network, like Visa or Mastercard, which passes it to the cardholder’s issuing bank.
4. The issuing bank checks the information for accuracy and the availability of money in the account before forwarding the authentication results back to the credit card processor.
5. If the issuing bank gives authorization to write off the money, the specified amount is transferred to the seller's account.
6. The customer receives the transaction report with the information on the authorized payment or on the refusal to accept the money transfer.

And there you have it - a general overview of how card transactions between cardmembers and merchants are settled. Depending on the seller's bank, the type of credit card, and the payment network used, a commission may be charged during the transaction settlement.

Fees Involved in Credit Card Processing

There are different types of fees associated with every credit card transaction’s settlement, namely:

• Interchange fee - These fees have to be paid by the acquirer to the card issuer for every card transaction. They vary depending on the type of bank card used for the transaction, its sum, and the business’s industry. Higher fees generally apply to online purchases due to their association with increased fraud risks.
• Payment processor fee - Payment processors also often charge fees for processing the transactions. These may be monthly charges, fees per transaction, equipment lease fares, and so on.
• Assessment fee - Merchants have to pay this charge directly to their credit card networks, and its sum will depend on their monthly transaction volume. The assessment and interchange fees, when combined, are often referred to as a “swipe fee”.

When picking a card payment processor, it is best to ensure that you are aware of all their fees and have enough funds to follow through with them.

Common Payment Processor Pricing Models

Another important factor to consider when it comes to accepting card transactions is the processor’s pricing model. Some of the most common tariff types are:

• Flat rate - If the merchant agrees to this pricing model, they will be charged a fixed fee for all card transactions regardless of the card type used during the purchase. Card-present transactions have a lower flat rate than card-not-present ones due to fewer fraud risks.
• Tiered - The payment processor will determine the fee based on factors like card type, transaction risk level, and your business’s overall daily or monthly transaction volume.
• Interchange Plus - This pricing model is often considered to be the best and most transparent one for businesses since the costs are separated into two clear categories: interchange fees and processor markup.
• Subscription - In this case, the merchant pays the processor a flat monthly service rate, together with a small per-transaction fee.

How Long Does It Take a Transaction to Go Through?

Credit card payments can take anywhere between 24 to 72 hours before the settlement is complete and the funds are released, with the majority of transactions being finalized within the first two business days.

However, merchants who work with processors can expect additional waiting time before receiving their funds. This is because such service providers separate transactions in batches and send payouts on a fixed schedule, generally once a week.

It may be possible that your processor makes payouts in batches based on a certain funds threshold that has to be reached. While such batch settlement can take longer, it is a cost-effective option, as it helps you avoid extra charges that can occur depending on the card payment delivery method.

What’s more, not all card payments are settled at the same speed. The speed with which the funds reach the merchant depends on various factors, including:

• Card transaction initiation time
• The method used to make the credit card purchase
• The credit card issuer

Online and phone card payments are generally the fastest to be settled, taking approximately 1 to 3 business days for the funds to arrive. Mailed credit card payments, on the other hand, are the longest to deliver and are vulnerable to delays caused by mail volumes and postal holidays.

If the funds still haven’t reached the merchant bank account before the due date, check the card transaction status with the payment processor. This can be done by making a call or submitting a support ticket and requesting a transaction report.

In-Store Credit Card Processing

When you present a bank card to a cashier in an offline store, the POS device reads the card data and payment information and sends it to the acquiring bank where the merchant has an account. The merchant's bank then contacts the cardholder’s bank. If the transaction is approved by the issuing bank, then the specified order amount of funds is transferred to the seller's account.

How to Optimize the Process?

It is only natural for a merchant to wish to deliver the best purchasing experiences for the customers on a daily basis. Luckily, land-based businesses have the opportunity to do so by optimizing credit card processing, with some of the best solutions being:

• Enabling contactless card payments through kiosks
• Facilitating the use of e-wallets through mobile devices
• Setting up mobile point of sale devices (mPOS)

It is also worth it for merchants to look into obtaining an all-in-one software and hardware solution, such as a smart POS device, which typically:

• Is integrated with the popular acquirer banks
• Supports many card types
• Offers multi-card support
• Features a user-friendly SDK
• Comes along with a convenient management system
• Boasts a sleek hardware design

What’s more, many smart POS device providers cater to the clients’ need for hardware and software technical help and support.

Credit Card Processing in E-Commerce

In e-commerce, credit card processing follows the same algorithm as in offline stores, with one exception: the POS terminal has to be replaced by a payment gateway. While a simple software solution may be sufficient for a small business, larger companies must think of card processing optimization.

How to Improve Card Processing in E-Commerce?

As the popularity of online businesses grows alongside the trading volumes, the need for smart card solutions arises. Therefore, an E-commerce gateway is more of a necessity rather than an optional tool.

Such a gateway features the following:

• Multi-acquirer approach. This means creating a unified network of acquirers that processes payments worldwide using Intelligent Transaction Routing (ITR). A multi-acquirer approach will provide control over the processes and boost conversions.
• Machine learning balancing system. Using a smart traffic balancing system will be a game-changer if your business is dealing with many acquiring banks. It will collect and analyze the information to route transaction batches to the processor with the highest efficiency.
• Reliable anti-fraud system. Introducing a multi-stage anti-fraud system is of utmost importance for risk management. It will block every fraudulent card transaction based on customizable criteria and prevent the loss of funds.

How Can Payneteasy Help?

At Payneteasy, we strive to provide users with intelligent solutions customized to their needs. As a business owner, you will appreciate the benefits we offer, namely:

• Fast and easy integration
• Full software and hardware technical support
• Flexible software to match any payment interaction
• Solutions tailored to your specific needs
• Extra-strong card fraud prevention systems
• User-friendly back office
• Branded checkout page
• Efficient traffic routing system

Throughout the years, our company has been demonstrating an unparalleled level of service and a high customer satisfaction rate. Our white label payment gateway solution is exactly what your business needs to level up credit card acceptance. Tell us about your business, and we will get back to you with a personalized offer and more helpful details within a day!