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How does a credit card transaction work?

From beginning to end, find out what goes on behind the scenes once you swipe your card

Summary

Follow the process that occurs once you pay for something with a credit card. Learn what roles everyone from you to your issuing bank play in a credit card transaction.

 

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You go into a store. You buy something. You swipe or insert your credit card in the payment terminal and you’re done. But did you ever wonder what goes on behind the scenes of a credit card transaction?

There’s a whole process involving you, the merchant, the payment processor, the acquirer and the issuing bank. Here’s exactly how a credit card transaction works.

What is a credit card transaction?

A credit card transaction occurs when someone with a credit card uses it at a merchant’s payment terminal or portal. This could be inserting, tapping or swiping at a brick-and-mortar location like a grocery store or inputting their credit card number online and over the phone. The payment is processed in a few moments and approved or denied. But here’s exactly what happens during a credit card transaction.

How does a credit card transaction work?

There are many steps involved in a credit card transaction. Here are the roles that the cardholder, merchant, payment processor, acquiring bank and issuing bank play:

Consumer 

Your role in the credit card transaction process is simple: You just swipe – or insert if your card has a chip, or tap if the contactless option is available – your card in the point-of-sale terminal, get approval, sign on the dotted line, receive the receipt and leave with your purchase.

Merchant 

Once you tap, swipe or insert your credit card in the payment terminal, the merchant’s bank – also known as the acquiring bank – is contacted for approval on the purchase. Next, the merchant bank gets authorization for your purchase from your credit card network, such as Visa or Mastercard.

Note: If your network is American Express or Discover, they serve as both the issuer and the payment network and do their own approvals. The payment network then communicates electronically with the credit card issuer – also known as the issuing bank where the cardholder’s account is – to ensure the card is valid and there’s enough available credit on it to cover your purchase.

If all is good and you have enough available credit, the issuing bank then sends the validated information back through the credit card network to the acquiring bank and the merchant receives it for the payment to complete. The customer signs the receipt, but the merchant hasn’t actually been paid yet.

When the store closes, the merchant sends a list to its bank showing all of the day’s credit card transactions – known as batch processing – and then the bank directs the transactions to the correct payment processor so the merchant account receives the deposit.

Payment processor

Think of credit card payment processors as the liaison between the merchants and the financial institutions. The payment processor not only authorizes credit card transactions, it pays the merchant by transferring the funds. Popular payment processing companies like PayPal, Stripe and Squarespace Commerce take the credit card information for each transaction and send it along the line, then receive it at the end of the process for the business.

Acquiring bank

The acquirer is another name for the merchant’s bank, and it arranges for credit card transaction payments to go into the merchant’s account. Sometimes, the acquirer and the credit card processor are the same. For example, if the merchant uses an American Express for a business account to receive payments and as a credit card processor, then Amex acts as both the acquiring bank and processing company.

Issuing bank

The bank that issues your credit card is in charge of sending the merchant an authorization code for your transaction. In order to approve the purchase, the issuing bank receives your credit card number and expiration date, your billing address, your card’s CVV code and the amount of the payment.

The bank either approves or declines your purchase. If your purchase is approved, the issuing bank will take an interchange fee, which it shares with the credit card network. Next, it transfers the funds, typically within one to three days, according to CreditCardProcessing.com.

If your card is declined, the merchant won’t be able to tell you why, so it’s important you contact your issuer immediately to find out why.

How long does it take for a credit card transaction to go through?

At the end of a credit card transaction, you sign for your purchase and leave the store, but the merchant hasn’t actually been paid yet – the payment for your purchase was only authorized.

Often, if you look online, the purchase might not show up on your credit card right away – it could take a few days. But if your issuer has a state-of-the-art reporting system, the authorized purchase might show up as a pending charge and be deducted from your available credit.

If you dine in at a restaurant, you might only see the pending charge for your total before the tip. Once the tip is entered in the system and the transaction is completed, you should see the final charge with the tip included on your account.

Can a pending transaction be declined?

Once a charge is pending on your account, it might stay there for a few days, just in case the merchant cancels or modifies it.

But for all intents and purposes, a bank can’t decline a pending transaction unless the merchant sends it a release saying it will not be collecting the pending funds.

Credit card processing fees

Merchants must pay for accepting credit card payments – and the fees vary. These fees include a merchant discount fee, which typically runs between 2% and 3% of the total purchase price of the transaction.

The merchant’s fee also includes an interchange fee, or a percentage that’s deducted from each card transaction and paid to the issuing bank, and an assessment fee – or “swipe fee” – which consists of a percentage of each credit card brand’s total monthly sales and goes to the issuers.

The interchange and assessment fees make up approximately between 75% and 80% of the processing costs. The rest of the processing fees include about 20% to 25% in markup costs, which acquiring banks and processors typically charge to cover the transaction cost and make a profit.

Bottom line

You now have a working knowledge of what happens each time you swipe your card – and the fees associated with credit card transactions.

While you certainly don’t need to be an expert regarding how credit card transactions work, understanding the basics will make you a better credit card consumer when you are aware of the process and understand all the fees that go into the price you end up paying at checkout.

Editorial Disclaimer

The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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