Merchant Processing 101: How Does Credit Card Processing Work?

merchant processing

Have you ever wondered how merchant processing works?

Every single day across the globe, consumers swipe cards or enter chips to pay for everything from a cup of coffee to groceries. Add on top of that e-commerce transactions, and you’re talking billions of dollars move every day.

How does a credit card transaction work? You just know that when you click or swipe, transactions are processed instantly.

Read on to learn the many steps of a credit card transaction and how merchant processing works.

What is Merchant Processing?

Merchant processing is simply the ability for a business to accept credit and debit card payments in a secure way. E-checks and ACH transactions also fall under merchant processing, too.

The common thread between these categories is security. All of these transactions, whether online or offline, have to happen over a secure connection. An insecure transaction can lead to fraud because sensitive credit card information is exposed.

How Does Merchant Processing Work?

A credit card transaction seems so simple because it happens so quickly. Did you know that there are seven steps every transaction takes? When you realize how complex the system is, and how fast money moves, it seems like a modern miracle.

Step 1: The Cardholder Wants a Product or Service

If you did a good job marketing your business, you’re bound to attract customers who want to buy your product or service.

The cardholder is your customer. They have a credit or debit card from a card issuing bank. Chase, Capital One, Bank of America, or your local bank are just a few examples.

The cardholder presents or enters their card information to make a purchase.

Step 2: Merchant Accepts Card Payments

A merchant is a business set up to accept credit card payments either in person or online. You can do this through a physical machine or through an online payment gateway.

Step 3: Acquiring Bank Routes the Transaction

The acquiring bank, or acquirer, is where the merchant keeps a merchant bank account. These banks are registered with specific card associations, like Visa, Mastercard, or American Express. When you open a merchant account, you’re really opening a line of credit to accept credit card payments. These acquiring banks take all the risk in case there’s a fraudulent transaction or chargeback.

In this step, the acquiring bank takes the transaction information, routes it through the card association to the customer’s bank.

Step 4: Issuing Bank Approves or Declines the Transaction

The customer’s bank is also known as the issuing bank. The issuing bank is a member of at least one card association, too.

All you have to do is look at your credit or debit card. If your card is a Visa, your bank is a member of the Visa bank association.

At this stage of the transaction, the issuing bank will receive the transaction information from the acquirer or the bank association. The issuing bank will either approve or decline the transaction. In most cases, the transaction is approved.

They may see that the transaction is out of the country and decline the transaction for security purposes. They may also see that there are not enough funds in the account and decline the transaction.

Step 5: Back to the Acquiring Bank

Once the issuing bank makes a decision, the card network (Visa or Mastercard) will then relay the response to the acquiring bank.

Step 6: Payment Approved

The process then goes to the merchant, where the receipt and response code are printed out. For online transactions, there will be a confirmation code.

That information is stored in the payment terminal or gateway to settle the transactions at the end of the day.

Step 7: Settlement

At the end of the day, all of the payments the merchant received that day are batched and reconciled.  The merchant will send the authorized transactions to the acquiring bank, which will reconcile the transactions with the proper card association.

The acquiring bank will also deposit funds into the merchant’s account. Depending on the processor that the merchant uses, the fees are withdrawn daily or monthly.

How Can You Accept Credit Card Payments?

Consumers prefer to pay with plastic, plain and simple. Only 12% of consumers like to pay with cash, while 77% would rather pay with a credit or debit card.

If your business isn’t set up with a merchant account, you can be missing out on a significant chunk of revenue.

Before you sign up for a merchant account, there are a number of things you should consider. For example, you want to know that you’re getting a merchant processing system that’s compliant with your industry’s standards and PCI compliant. 

You can get approved for a merchant processing account, regardless of your situation. You may have tried to get approved in the past for merchant accounts, but weren’t approved because your business credit may be low or you’re classified as a high-risk business.

HighRiskCreditSolutions.com can assist your business with merchant processing. We work with all types of businesses considered to be high risk, from travel to health and fitness, and all types of businesses in between.

Get a Merchant Processing Account Started Today

There’s a lot that happens behind the scenes when you accept a credit card payment. Money seems to move instantaneously like magic. Money then appears in your bank account, which will help you grow your business.

Your customers won’t wait around for your business to accept credit card payments. Instead, they’ll just go to another business that will gladly accept their money.

There’s no reason for your business to be left out. If you have bad credit or you’re in a high risk business it’s possible for your business to be approved for a merchant processing account. Start your online application today.

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