Credit Card Processing 101

The cardholder presents their card in person (tap, chip, swipe or manual entry) or enters their credit card details for an e-commerce payment (card not present). The merchant sends a request for authorization to the payment processor. The payment processor takes the transaction through to the appropriate payment network then finally lands at the issuing bank. The issuing bank approves or declines the transaction. Authorization can depend on assorted criteria which can depend on bank and card type. Authorization could depend on CVV, AVS (Address Verification Service) and expiration date. After the card is approved or declined the issuing bank replies with the status though the bank card network, then to the merchant bank and finally back to the merchant. It starts with the payment device or POS system traveling across the bank card network, to the necessary banks and then taking the return trip back to the POS or payment terminal with the response all in a matter of seconds. As you can see to authorize a card you need to have a working internet connection. Some POS systems have an “offline” mode but really they just store the card information and try to run the transaction when the internet connection is restored. There is a risk though. When the internet is restored and you run the card it may authorize or it may decline. The risk is if it declines the person and card most likely will not be around to provide an alternative form of payment.

Each transaction, all approvals and declines, are logged. When looking for past transactions the information comes in very handy. All these logged transactions get settled into what they call a batch. Depending on the POS and Payment device configuration there could be one batch for the whole day with all transactions or there could be multiple batches, one for each payment device. Also depending on POS and/or payment device configuration the batch will either be manually submitted by the merchant or have an automatic batch closing time set. Either manually submitted or automatically done the merchant sends the batch to the payment processor. The payment processor takes the batch though the card networks to the issuing bank. Now that the issuing bank has the batch, they charge the card holders account the amount of the transaction.

Next the issuing bank transfers the funds to the merchants bank sans interchange fees. Finally the merchant bank deposits the funds into the merchant's account. At this point the batch has fully settled and merchants/business should have the money from the sale in their bank account. The timing of funding depends on the time of the batch from the merchant. Issuing banks have set times that the batch has to be sent if you want next day funding. Next day funding is when you get payment from yesterday's transaction the next day. If you batch later than their cut off time you will not get the next day funding but rather the following day. For example if the batch cut off time is 8pm and you batch at 9pm you will NOT get next day funding. Conversely with the same cut off time and you batch out at 7pm you will get yesterday credit card transactions deposited into your bank account the very next day.