Follow the process that occurs once you pay for something with a credit card. Learn what role everyone from you to your issuing bank plays in a credit card transaction.
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 uses a credit card 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 your credit card number online or over the phone. The payment is processed and then approved or denied in a few moments.
How credit card transactions 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:
Your role in the credit card transaction process is simple: You just swipe, insert or tap your card at the point-of-sale terminal, get approval, sign on the dotted line, receive the receipt and leave with your purchase.
Once you present your credit card at 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.
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.
Note: If your network is American Express or Discover, they serve as both the issuer and the payment network and do their own approvals.
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 then 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.
Think of credit card payment processors as the liaison between the merchants and the financial institutions. The payment processor authorizes credit card transactions and 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.
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 has an American Express business account for receiving payments and uses American Express as a credit card processor, then Amex acts as both the acquiring bank and processing company.
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.
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 credit card transactions take
At the end of a credit card transaction, you sign for your purchase and leave the store, but the payment for your purchase was only authorized, not delivered to the merchant.
Often, if you look at your account online or through your issuer’s app, the authorized purchase might show up right away as a pending charge, rather than a completed charge, and be deducted from your available credit. In some cases, it takes a few days for the charge to appear.
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, like in the case of adding an approved tip. 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 percent and 3 percent 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 percent and 80 percent of the processing costs. The rest of the processing fees include about 20 percent to 25 percent in markup costs, which acquiring banks and processors typically charge to cover the transaction cost and make a profit.
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 on how credit card transactions work, it can be useful to understand the complex process and all the fees that go into the price you end up paying at checkout.