Card Payment Processing

Using a credit card can be confusing. There are so many fees to pay and policies and regulations to keep up with, it’s hard to care about what goes on behind the scenes. As long as your credit card works and you can pay all your bills in time, everything’s good. But, sometimes, knowing how your credit card works in the background can make the rules put in place make more sense.

Most banks offer a credit card and debit card when you open a checking account and, when they don’t, you can separately apply for one. These banks are called issuing banks, aka credit card issuers: financial institutions that provide credit cards to customers, set the credit limit, and create terms and benefits unique to the cardholder depending on their payment history and reliability. Although credit card issuers aren’t limited to banks, banks are the most common medium, giving way to the name issuing banks, but include any lending institution, like a credit union.

Once you’ve paid for something by your card, the money is borrowed from the issuing bank and deposited into an acquiring bank, the bank of the merchant’s account. But how does this happen? It starts with you, the cardholder.

It doesn’t matter where you make your purchase, whether it’s online or in-person, as long as you have the means to pay for it. Once the required credit card information has been provided, the merchant may process it and send it on to a payment gateway, where the payment process begins.

Payment gateways take away the need for the merchant to manually enter the information received and facilitate the payment process. The payment gateway encrypts sensitive information, makes sure the data is PCI compliant, and sends it to the payment processor, which then secures the address of the cardholder’s issuing bank for authorization of the transaction.

Here, the credit card network, the company that provides a form of communication between the merchant and the card issuer, either approves or declines the authority to process the transaction, depending on how much pending credit the cardholder still has to pay (which the issuing bank confirms).

The card network then communicates whether the decision has been authorized or denied to the acquiring bank, the merchant’s account. From there, the acquirer relays the information to the merchant. If the process has been denied, the payment won’t be made, however, if it’s been approved, the merchant has the option of accepting the money or declining it. Should they choose to accept it, the acquiring bank transfers the due amount into the merchant’s account.

From there, the card network transfers the same amount of money from the issuer to the acquirer, and it is this transaction that shows up, out of the many transactions, in the cardholder’s monthly billing statement. The transfer of funds, from the acquiring bank to the merchant’s account and then the issuing bank to the acquiring bank, often takes at least a few days to complete.

But this, being the simplified process of the payment process, doesn’t account for the incessant number of credit card transaction fees cardholders always seem to have to pay for. Even if we ignore interest charges, late payments, and annual fees, there are fees present in the simplest of purchases, the amount deducted from the credit card owner’s account is never the same amount as the good or service bought. In a normal transaction, several fees add onto the total amount required, the most basic of which are the interchange and acquiring fees.

After the transaction has been approved by the issuer and merchant and the acquiring bank transfers funds into the merchant’s account, the bank keeps an acquiring fee, the fee the acquiring bank charges for processing the merchant’s daily credit card transactions. When the issuing bank receives the payment from the cardholder to pay the acquirer with, the issuer keeps 1%-3% of the transaction, depending on the value and volume transferred. Other charges include transaction discounting rate (TDR), data processing, and more.

TDR accounts for the charges merchants have to pay for the service of a POS (point of sale) system, a machine that facilitates payment processing, and where a retail transaction is completed. The amount charged depends on the transactions processed and is split between the credit card issuer, acquirer, and network. Data processing racks up charges for functions that support the processing of information and transactions, like clearing, network access, authorization, and maintenance services.