How does credit card processing work?

Credit card processing is the system that allows merchants to accept credit and debit cards as payment for goods and services. This system comprises three main players: the card issuer, the acquirer, and the merchant.

The card issuer is the financial institution that issues the credit or debit card. The acquirer is the financial institution that processes credit card transactions on behalf of the merchant. The merchant is the organization or individual that provides goods or services to customers, and submits transaction data for authorization, settlement, and statementing purposes.

Credit card processing typically requires all three parties to be involved in order for the transaction to go through successfully. Unless these players are involved, it’s not possible to accept credit card payments for goods and services.

Card issuers want their cards to be accepted as widely as possible, so they enter into agreements with acquirers that allow merchants using specific point of sale (POS) software or payment terminals to accept their cards. Acquirers serve as the link between card issuing banks and merchants by processing credit card transactions and sharing a percentage of the fee with the merchant.

Merchants submit an authorization request to their acquirer, which then passes it on to the card issuer for approval or denial. Once approved, authorization requests are transmitted through a network from merchant’s POS software to its acquirer. An authorization request contains information about the transaction, such as the amount, the merchant, and the card type.

If a card is valid and there are enough funds available in the account, the issuer will approve the request and set a hold on those funds. The hold will generally last for three to five business days, which gives the cardholder time to dispute the charge if necessary. The acquirer then communicates the authorization request to the merchant, and the merchant can begin to process the order.

If a card is not valid, or if there are not enough funds available in the account, the issuer will deny the request. This generally happens when a customer attempts to use a card that has been reported lost or stolen, when a customer tries to use a card outside of the geographic region it was issued in, if the issuer has been advised that a transaction may be fraudulent or is otherwise suspicious, or if there isn’t enough money available for the requested amount. A decline response will contain information about why the transaction was declined and what action the merchant should take next.

If the transaction is approved, the acquirer will transmit an authorization response to the merchant’s POS software, which takes care of preparing and processing the customer’s order. If the transaction is declined, its response tells you who to contact for additional information about why it was declined. For example, merchants might want to call their customer if they suspect a transaction was fraudulent, or they could call the credit card company if they suspect a card was cancelled due to non-payment.

The authorization response is also transmitted to the card issuer, which will update its records show that a hold has been placed on those funds. In case of an approval, these funds are guaranteed by the acquirer and the issuer until the merchant is given a final response. In case of a decline, the card issuer may still release those funds to the acquirer depending on its business rules and policies. If this happens, the acquirer will inform the merchant of this action by transmitting a capture request.

After receiving an authorization response, merchants who accept Visa credit card payments need to wait until their acquirer transmits a capture request. Visa rules state that the merchant must implement the capture process within two to five business days of receiving an authorization response, but merchants may be able to get extensions from their acquirer if needed. In most cases, this should happen automatically. If not, the merchant can contact its acquirer to request a capture.

Once the capture process is initiated, the funds are transferred from the cardholder’s account to the merchant’s account and the hold is released. The merchant can then ship the order to the customer or provide them with a receipt for in-person payments.