How credit card transactions work

Interactive guide shows how merchants, banks process card purchases

By Tyler Metzger

More than 23 billion credit cards transactions were processed in the United States in 2007, and they are projected to grow by 26 percent over the next five years, according to the Nilson Report. But have you ever wondered what exactly happens after your card is swiped?

Use this guide to to find out how your credit card transactions are processed.

Download the printable version of this story.

How a credit card is processed

Step 1, Authorization

1. The cardholder requests a purchase from the merchant.

2. The merchant submits the request to the acquirer.

3. The acquirer sends a request to the issuer to authorize the transaction.

4. An authorization code is sent to the acquirer if there is valid credit available.

5. The acquirer authorizes the transaction.

6. The cardholder receives the product.

Step 2, Batching

1. The merchant stores all the day's authorized sales in a batch.

2. The merchant sends the batch to the acquirer at the end of the day to receive payment.

Step 3, Clearing

1. The batch is sent through the card network to request payment from the issuer.

2. The card network distributes each transaction to the appropriate issuer.

3. The issuer subtracts its interchange fees, which are shared with the card network, and transfers the amount.

4. The card network routes the amount to the acquirer.

Step 4, Funding

1. The acquirer subtracts its discount rate and pays the merchant the remainder.

2. The cardholder is billed.

Glossary

Acquirer: A bank that processes and settles a merchant's credit card transactions with the help of a card issuer.

Authorization: The first step in processing a credit card. After a merchant swipes the card, the data is submitted to merchant’s bank, called an acquirer, to request authorization for the sale. The acquirer then routes the request to the card-issuing bank, where it is authorized or denied, and the merchant is allowed to process the sale.

Batching: The second step in processing a credit card. At the end of a day, the merchant reviews all the day’s sales to ensure they were authorized and signed by the cardholder. It then transmits all the sales at once, called a batch, to the acquirer to receive payment.

Card network: Visa, MasterCard or other networks that act as an intermediary between an acquirer and an issuer to authorize credit card transactions.

Clearing: The third step in processing a credit card. After the acquirer receives the batch, it sends it through the card network, where each sale is routed to the appropriate issuing bank. The issuing bank then subtracts its interchange fees, which are shared with the card network, and transfers the remaining amount through the network back to the acquirer.

Discount fee: A processing fee paid by merchants to acquirers to cover the cost of processing credit cards.

Funding: The fourth and final step in processing a credit card. After receiving payment from the issuer, minus interchange fees, the acquirer subtracts its discount fee and sends the remainder to the merchant. The merchant is now paid for the transaction, and the cardholder is billed.

Interchange Fee: A charge paid by merchants to a credit card issuer and a card network as a fee for accepting credit cards. They generally range from 1 to 3 percent.

Issuer: An financial institution, bank, credit union or company that issues or helps issue cards to cardholders.

Other interactives: 2005-2008 bankruptcy filings by state, State statutes of limitation for credit card debt, Anatomy of a credit card

See related: Credit card processing services for nonprofit organizations, How credit cards work, Merchant processing fees affect businesses, card issuers, Interchange fees debated at Senate hearing, How to select a credit card processor for your small business

Published: January 14, 2009

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