Every day, billions of credit card transactions are completed through an ever-active system of banks, processes, and merchants. These transactions are completed in a matter of seconds and involve the transmission of relevant transaction information from the terminal to a processor through a card network to the card-issuing bank which then returns an authorization to the card processor. Only when these authorizations are settled can payments be deposited into your merchant account. These two stages (authorization and settlement) are important for every credit card transaction and a failure in either of these steps means funds will not be deposited or an increase in processing cost.
How does Merchant Bank Credit Card Processing Work?
To understand how credit card processing work, it is important that you know the key players involved in all the stages of this process beginning with the cardholder, the business (or merchant) to receive payment, the merchant bank, the cardholder’s bank (also known as the issuing bank) and the card association (e.g MasterCard or Visa).
The cardholder as the name implies is the person that holds the bankcard and presents the card to pay for a good or service purchased from the merchant. The merchant in this case is the business that receives the payment and such a business must have a merchant account with an acquiring bank (merchant bank) registered with the card association. This allows them to accept credit card payment from the cardholder.
Typically, the merchant bank also provides the equipment needed by the merchant to receive card payments. However, it is not uncommon for the merchant bank to use third-party sales organizations (ISOs) or membership service provides to run merchant accounts.
The Cardholder’s bank (also known as the issuing bank) is responsible for paying into the merchant account of the merchant when a cardholder makes a purchase. Both the issuing banks and merchant banks are registered with the card associations which act as clearinghouses for card transactions and as a governing body for the associations involves in card processing and all electronic payments. They also provide the network on which these transaction data are transmitted.
Authorization stage
All the key players explained above are involved in this stage of the transaction. The cardholder presents the card for payment, the merchant takes payment with their credit card machine, payment gateway, or software. This transmits the relevant information and transaction details to the acquiring bank. Behind the scene, the acquiring back sends relevant information to the cardholder’s bank for approval through the card association’s network. (BankNet for MasterCard and VisaNet for Visa). on receiving the transaction information, the cardholder’s bank will carry out necessary checks and decline or approve the transaction then pass the information to the acquiring bank accordingly. A response is also translated to the merchant’s terminal to indicate whether the transaction has been approved or not.
Clearing and settlement
In the second part of the card transaction, the merchant sends the batch of authorizations (typically for a day) to the merchant bank. The authorizations are reconciled with the bank’s records and passed along to the card association. The funds for these transactions are also deposited into the merchant’s account by the bank after deducting necessary processing fees. The card issuing bank makes payment to the acquiring bank (on behalf of the cardholder) until the cardholder pays the issuing bank for the purchase based on agreed terms.
Conclusion
This is a general format for processing credit card transactions no matter the card association, acquiring bank, or issuing banks involved. What may vary, however, is the amount of processing fees you may be required to pay which is why you should shop around for the best rates and terms in selecting the bank you choose to set up your merchant bank account with.