How Does Credit Card Processing Work?

You don’t need to have a comprehensive understanding of how the bankcard system work before you can find the best credit card processor. However, it’s good to have a general idea involved in credit card processing because there are fees at various system stages. The information below will explain how a credit card work, what authorize.net is, and its uses.


Credit Card Processing

What Is Authorize.Net?

Authorize.net is a US-based payment gateway service provider that enables merchants to accept payment by credit card and electronic check payments directly from their websites through an Internet Protocol (IP) connection. Authorize.net can be regarded as a payment processor and provider of merchant accounts. It processes credit cards and ACH payments for small and medium-sized enterprises. Furthermore, it is a kind of payment gateway.

A payment gateway is an online equivalent of a credit card terminal. The function of payment gateways is to encrypt and then securely approve a credit card transaction.

The easiest way to explain a payment portal is to describe it as a box in which your customers enter their information to make online payments. A more precise definition is software that transports credit card payments from the point of sale (POS) to a credit card processor. Authorizen.net is a third-party payment gateway used by credit card processors that do not have their own gateway software or by customers who prefer a third option.   


What Does Authorize.Net For The Customer?

Authorize.net gives your customers the ability to choose the payment options they prefer. This option makes it easy for your customers to pay online by accepting Apple Pay, PayPal, major credit cards, debit cards, eCheck and more.

Authorize.net provides automated billing for repeat customers and subscription purchases. Its recurring billing tool makes billing more efficient and secure by eliminating the need to re-enter billing, payment, and transaction details.


What Does Authorize.Net Process?

Authorize.net functions as a connection between the financial bodies handling the processing and settlement of credit card transactions.

Payment gateways are needed when approving a credit card transaction because they are responsible for saving sensitive credit card information. Authorize.net also enables many extra features, such as:


· Automatic Recurring Billing

The Automatic Recurring Billing makes it easy for you to automatically charge recurring payments to a credit card at your desired frequency.


· Customer Information Manager

The Customer Information Manager securely stores your customer’s credit card information and remains PCI compliant. It stores up to ten credit cards per customer.


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· Advanced Fraud Detection

Advanced Fraud Detection protects you from online fraud by permitting velocity filters, IP blocking, maximum/minimum transaction limits, and more.


· Account Updater

Every credit card data stored on Authorize.net can be automatically updated when the card expires by the Account Updater.

It also supports standard and advanced anti-fraud tools such as address verification and 3DSecure. AuthorizeNet enables you to make periodic and recurring payments such as memberships and offers options for B2B credit card companies that need commercial credit cards accepted. Its services are robust and offer several additional features that make its gateway more than accepting credit cards over the Internet.


What Is Credit Card Processing?

Credit card processing is the sequence of operations that are needed to complete the payments made with a credit card either by mail, over the phone, online, or in person.


The Main Factors Involved In The Processing Of Credit Cards

The main involved factors that are settlement and authorization of credit cards include the card associations (MasterCard and Visa), the issuing bank (the cardholder’s bank), the acquiring bank (the business’s bank), the merchant (business), and the cardholder (customer).


· Cardholder (Customer)

If you have a debit or credit card, you are already familiar with the function of the cardholder. A cardholder is anyone who gets a bank card (debit or credit) from a bank issuing such card. The card is then presented at a business venture to pay for goods or services.


· Merchant

A merchant is technically any business venture that sells goods or services. However, only merchants that receive cards as a means of payment are relevant to this explanation. A merchant is any business that retains a merchant account that allows them to accept debit or credit cards as a form of payment from cardholders (customers) for goods bought or for services provided.


· Merchant’s Bank (Acquiring Bank)

A merchant bank is a registered unit of the card associations (MasterCard and Visa). A merchant bank is often referred to as an acquiring bank because they bond with merchants to build and maintain accounts referred to as merchant accounts. This aspect enables the business to be able to accept debit and credit cards.

Acquiring banks equip merchants with software and equipment that makes it possible for them to accept cards, conduct customer service, and other essential aspects of accepting cards. Also, the acquiring bank deposits funds from the sales of credit cards into a merchant’s account.

Acquiring banks provide merchants with the equipment and software to accept cards, manage customer service, and other necessary aspects of card acceptance. Acquiring banks are often referred to as commercial banks because they enter into contracts with merchants to set up and maintain accounts (so-called merchant accounts), allowing them to accept credit and debit cards.


· Issuing Bank (Cardholder Bank)

An issuing bank gives credit cards to consumers. The issuing bank is a member of the card associations (MasterCard and Visa).

Issuing banks reimburse funds back to the acquiring banks for purchases that their cardholders make. Then, the cardholder must pay their issuing bank under the terms and conditions of their credit card agreement.


· Card Associations (MasterCard and Visa)

MasterCard and Visa are not banks and are also not responsible for issuing credit cards to customers. They instead act as custodians and a clearinghouse for their credit card brand. They also serve as the regulating body of a community of financial institutions, MSPs, and ISOs that fit together in an alliance to support electronic payments and credit card processing. Thus the name, “card associations.”

The primary obligations of the Card Association are to oversee the members of their associations, which include qualification guidelines and interchange fees, act as the judge between acquiring and issuing banks, improve and maintain the card’s brand and network, and make a profit.

Visa makes use of its VisaNet system to send data between association members. MasterCard also makes use of its Bank net network.


· Payment Processors

Payment processors are financial institutions that work in the background to process and process credit and debit card transactions. Together with their acquiring bank or bank, payment processors collect information and transaction details from the cardholder, forward them to the appropriate card networks and cardholders, and issue bank authorizations.


Credit Card Authorization

Credit Card Authorization is the process whereby a merchant receives permission from a bank that issues a customer card with accepting a credit card for payment. The authorization includes assessing the cardholder’s transaction risk and the approval of the reserved sales amount in the cardholder’s account. Authorization requests begin with cardholders swiping their debit or credit card into a traditional credit card reader or virtual terminal.


Is Credit Card Authorization Necessary?

The credit card authorization process is an essential step in completing a credit card transaction. Authorization is necessary to verify that the cardholder of the credit card has sufficient funds to authorize the purchase from the merchant.


How Does The Credit Card Authorization Work?

During the authorization process, the payment processor receives information about the cardholder and communicates with the issuing bank to verify that the card is valid. The cardholder has enough funds to cover the amount of the credit card transaction. Most traders proceed with an authorization after the transaction is completed but have the option of placing an authorization. An authorization inventory is reserved for a certain amount of available funds that the trader must have before completing a transaction.

The credit card authorization key, which is neither visible to the customer nor the merchant, is transferred encrypted to his payment service provider by the merchant’s point-of-sale (POS) system. Once the processing provider confirms that the customer has enough funds to complete the transaction, the authorization key is sent to the PoS system, which initiates the transaction.

In the first phase of authorization, the merchant receives account information and transaction amounts from the payment processor. In the second phase of the settlement process, the cardholder sends the transaction to the payment processor the following day. It includes all transactions that did not occur on the day of the transaction and the authorization code. As part of the settlement, money from the transaction, including any unauthorized transactions, will be transferred to the merchant account.


Credit Card Processing

Credit Card Clearing And Settlement

The clearing and settlement of the original transaction take place between the bank, payment processor, and the credit card network and functions as such. Money must change hands, a credit card processing fee to the appropriate service provider must be paid, and the money from credit or debit card payments must find its way into the merchant’s bank account.

A third payment processor connects the trader to the financial institution that authorized the transaction and facilitates funds transfer. After the money from the transactions has been transferred to the card network, the card is issued to the bank that owns it, and the money is on its way to its account. The issuing bank does not have the infrastructure to connect to the payment network.

The merchant uses their credit card machine or software gateway to transmit information and credit card transaction details to the bank or bank they acquired. The cardholder starts the transaction by presenting the merchant with his card to pay for goods and services. The merchant, the bank, and the processor collect the information, forward it to the appropriate card network, and the cardholders issue the bank for approval.


What Does The Transaction Process Involve?

Transaction processing involves the payment information and related data that are passed around to facilitate the authorization, clearing, and settlement of transactions between the Visa issuer (the financial institution issuing the Visa card to the cardholder) and the acquirer (a financial institution providing Visa network connectivity and payment acceptance to merchants). MasterCard transaction information is forwarded to the issuing and acquiring bank via the MasterCards BankNet network.

After the authorization process has been approved or rejected, the transaction purchase is completed, and cash is paid out. Settlement is the exchange of funds between the card issuer and the acquiring bank. The settlement process calculates, determines, reports, and transfers the net financial position of our issuers and acquirers after completion of the transaction.


How Long Can A Settlement Period Take?

The settlement period can take between one and two business days, but most transactions are processed daily and go through the settlement process in real-time. There is only one billing window for transactions with a duplicate or consistent message, and the billing is net.

Your provider forwards the charge to the issuing bank, and the bank clears the money and approves the transaction in your merchant account minus the interchange fee. Credit card clearance may take a few seconds to be credited to the merchant account. Still, the payment processing time (the time it takes for the money to arrive in your bank account) can be between one and three business days, during which the acquiring bank balances the payment and releases the money. Once payment is processed, you or the merchant pull the card through the reader and punch the credit card number into the system, which affects the fees you are charged for each transaction.


How Credit Card Processing Works

The processing of credit cards begins at the consumer level. The customer with their credit card starts a payment.

Afterward, the customer shares the information of the payment with the merchant.

The merchant then accepts the payment information either in person as a “card-present” transaction or through telephone as a “card-not-present” transaction or online.

The payment information transmits to the processor of the credit card, who then sends it to the card network. The payment information then transfers to the customer (issuing) bank.

The customer bank is accountable for verifying sufficient credit or funds in the cardholder’s account to finalize the transaction. Also, the bank may carry out some security checks to make sure the purchase is valid. In the end, the credit card processor decides whether the transaction is approved or declined.


The common reasons for a declined transaction include:
  • Credit limit reached
  • Insufficient funds
  • And unauthorized purchase. For example, if the card is marked as stolen or lost.

If the trade passes the customer bank’s verification processes, the money is sent from the customer’s bank to the merchant account and, after that, enters the settlement process.

In the meantime, the notification travels back from the customer bank to the origin of the sale. Its outcome will display a message on the virtual terminal or card reader informing the merchant if the transaction has been “declined” or “approved.”

The last step is the settlement, usually taking days depending on the card’s network involved in the transaction.

Settlement is the authorized transfer of the trade amount from the customer bank to the merchant bank.


Credit Card Processing

Credit Card Processing Funding And Fees

What Is A Processing Fee?

A credit card fee is a fee you pay with the proceeds of a credit card transaction. Companies that accept credit cards for online payments can charge for each transaction a small fee known as a payment processing fee.

Every time a customer purchases with a credit card, the company must pay a fee to accept the credit payment. Transaction fees are charged every time a credit or debit card is purchased.

It is about what the bank charges the cardholder for the amount of the transaction. A merchant account allows a company to accept credit card payments, and the merchant account provider periodically transfers payments to the merchant’s bank account. Depending on the transaction volume and type of transaction, the provider may charge a small fee in addition to the interchange fee.

The fee varies depending on several things, such as the industry, the amount sold, and the type of card used. For online purchases, fees may be higher, considering the increased risk of fraud if the credit card is not present during the transaction. Note that interchange charges also depend on the card type, how much is charged, and what kind of deal is being done.


You Pay The Fee Nooo Matter It’s Called

Each of the two financial institutions involved in a credit card transaction charges its own fees – which means the total amount of money from the transaction ends up in your pocket less than what you charge the customer. Each party makes a profit when they end up receiving a portion of the transaction fees for credit card processing. Transaction fees consist of interchange interest, valuation fees, and payment processors, with one party receiving a certain proportion of the costs you pay as an entrepreneur.

The bank which issued the card charges an interchange fee, and the acquiring bank charges a discount rate. The cardholder and the bank transfer the sales amount (the interchange fee) to the acquiring bank. The amount is paid as a discount fee to the merchant account at the acquired bank.


Credit Card Fee Deductions – Discounting

Most credit card processors deduct the transaction fee, also known as a merchant fee, from your customer’s original payment. This circumstance means that you pass on your savings in credit card processing to your customers. However, most firms do not do any harm by offering a cash discount when you set the price of an account.

Credit card processors charge service fees to pay credit card fees on behalf of the merchant, eliminating the need for backend accounting and complex account statements. Credit card processing fees are the costs merchants pay for interchange and valuation fees by the payment network so merchants can be more flexible with payment processors. Merchants can see their credit card processing fee reduced by a small technology fee paid at the end of each month.

This process may not be the most appealing look, but it’s common, so it makes sense for many business owners to direct the conversation to credit card deductions. Suppose merchants impose a surcharge on credit card purchases, even if their state permits it. In that case, I think this can have a negative impact on customers, especially if they pay a substantial amount for the purchase. After paying the surcharge myself, I wondered if my business was damaged or about to go under.


Let The Structures Work For You

Understanding how these tariffs and structures work can help you choose the best for your business without incurring unnecessary costs. If, for example, you sign up with a credit card processing company that provides you with a terminal to help you process your transaction, you may incur an initial fee. Understanding these costs will help you choose a provider with the best rates and lowest fees.

Credit Card Processing

The Bottom Line

When it comes down to it, as with debit cards, credit card processing is a unique process in which customers choose to receive credit or go through the transaction flow between signature and debit described above. Customers want credit, they want rewards, and of course, online shopping is a convenient way to pay in person, so retailers want to make it as easy as possible for people to pay online when they don’t have cash at hand. Many middlemen are involved in this process, focusing on network operations, conducting transactions, researching new anti-fraud techniques, setting prices, and setting interchange fees. Having said that, choosing a suitable payment processor can make a massive difference in reducing credit card processing fees. Companies have the power to minimize costs by buying different payment processors.

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Mydollarbillshttps://www.mydollarbills.com
Hi, we are Lena and Chris. A finance-addicted couple from Germany. Ever since we can remember we are interested in finance. We love to research and review complex topics. As we were quite familiar with the world of finance at all, we thought we should share this information with the rest of the world. Our main reason we do this is to help people to orientate themselves in the confusing daily finance puzzle.

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