How Are Credit Card Transactions Processed?

Your business will process several credit card transactions each day. Each transaction will help you get the money your business needs to stay operational. But how do these credit card transactions work?

Who Participates In a Transaction?

A credit card transaction entails effort from multiple parties to move everything forward. Here are some of the more prominent parties that will appear in a credit card transaction:

·         Cardholder – The person paying for something with a credit card

·         Card issuer – The bank that issues a card under the Visa or MasterCard network

·         Acquiring bank – A bank or processor that is a registered member of the Visa or MasterCard card association; it will help you create a merchant account that lets you accept credit and debit cards

·         Issuing bank – The cardholder’s bank; the issuing bank pays the acquiring bank for the purchases the cardholder makes with the cardholder being responsible for paying back the issuing bank

·         Card association – A network that operates a card brand and functions as a clearinghouse for transactions with that brand; Visa and MasterCard are the most popular ones, while American Express operates as both a card association and its own bank

Five Basic Steps

The credit card processing routine involves five basic steps:

  1. Authorizing the transaction
  2. Authenticating the card information
  3. Clearing the funds with an issuer transferring data to a processing bank
  4. Gathering information necessary to settle the payment
  5. Settling the payment with an issuing bank sending funds to the acquiring bank, which will then go to the merchant

The Initial Purchase

The processing effort starts with the cardholder providing you a credit card number. Your business software will send the credit card data to your processor or acquiring bank.

The processor will contact the card association to validate the card data. It will seek permission to access the brand network to facilitate the transaction. The customer’s address, CVV data, and other factors may be confirmed to ensure it is the correct person. The effort reduces the possible risk of fraud in the transaction.

The card brand and issuing bank will send one of two responses:

  1. Approved – The transaction will go forward, and the funds will be held from the customer’s card. You will eventually receive those funds.
  2. Declined – Your processor and the issuing bank will receive records on the attempt to use a card. No money will go forward at this point.

Settling the Order

The network can go through the settlement process after the initial order. An approved order will be held in a series of payments that will be processed at the end of the business day.

The processor will review the approved orders and send the batch out over each card network. The networks will review the data and will confirm the transactions, thus allowing the merchant to receive the funds one is owed.

The networks must send all transaction data to the proper cardholder banks. Each bank must confirm the data to ensure the cardholders have the funds necessary to complete each transaction. Each bank may also have its own unique processing fees that must be added to each deal.

You will receive your funds in a few business days after the settlement process is complete. Some processors can help you get your funds the next business day, although that depends on when you can submit those transactions to the network.

Fees In the Process

You will not collect all the funds that go through the network in this process. There are two types of fees you will spend when handling each transaction:

  1. Interchange rate

The interchange rate is something a card network will impose on your business based on your industry, the type of card someone uses, and the value of the purchase. Interchange rates are set by networks and cannot be negotiated for better terms.

  1. Merchant processing fee

The processor or acquiring bank that handles your funds will also take out an additional fee alongside the interchange rate. The processing fee will cover the effort to keep the network active and to confirm all transactions.

The total amount you’ll spend on fees will vary, but you could expect to spend about two to three percent of each transaction on these charges. While the total may seem small, the charges can add up to where your profit margins might be hurt. You can negotiate a better deal on your merchant processing fees in some situations, although that works best if you have more credit.

All Networks Work Differently

The major credit card networks will handle your transactions in different ways:


Visa uses its VisaNet system to review authorization requests it gets from acquiring banks. VisaNet will send the responses it gets to the acquiring bank, which returns it to the merchant. VisaNet also manages the settlement process.


MasterCard’s approach is about the same as what Visa uses. But MasterCard transactions could take one more business day to complete, as MasterCard uses more thorough approaches to reviewing cardholder data. It also has to work with multiple cardholder banks with individual statements for all.

American Express

American Express is both the card issuer and bank. The closed system makes it where Amex does not let other parties issue cards.

The transaction effort entails Amex sending approval or decline messages to merchants for each transaction. The card members will receive billing statements after a while, in which new cases are opened to ensure everyone pays their funds. While a merchant will receive one’s funds with American Express sooner, there’s always a chance the merchant could lose those funds if the customer is unable to pay off one’s Amex card. But Amex does have one of the country’s highest payback rates, so the risk of that happening is minimal. This is also a part of why Amex has significantly higher rates.


Discover’s process is similar to what American Express uses. Discover also works as the issuing and acquiring bank here.

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