Credit Card Processing Fundamentals

U.S. credit card purchase transactions amounted to 20.2 trillion dollars in 2009. That is a whole lot of revenue generated by plastic carrying consumers, and a great persuasion for any business owner on the fence about accepting credit cards. Take a look at exactly how credit and debit cards are processed.

Merchant Account
A merchant account is required in order for a business to accept credit (or debit) cards for payment. Business owners can obtain a merchant account through their bank, a credit card processor, or an independent sales organization (ISO). Many banks will refer risky, limited, or new small businesses to an ISO for their merchant account. An ISO will provide businesses with the equipment, supplies, and knowledge needed to accept credit cards.

Equipment
When a customer offers their credit (or debit) card for payment, the card information is recorded using an imprinter, point-of-sale terminal, virtual terminal, or Smartphone and sent over the processor’s network.

Parties Involved
There are five parties involved in the processing of payment cards: the cardholder, merchant, acquirer, card association, and card issuer.

• Cardholder – the person presenting their card for payment of goods, or services.
• Merchant – the business accepting the cardholders’ payment card, in exchange for goods or services.
• Acquirer – also known as the processor, is the party who provides credit card processing for the merchant.
• Card Association – a network (Visa, MasterCard, Discover, etc.) portal between the issuer and acquirer. Associations provide authorizations and funding of payment card transactions.
• Card issuer – the party who issued the payment card to the cardholder.

Processing Flow
Credit and debit card processing begins with the customer presenting their card to the merchant for payment, and ends when the merchant receives those funds from the processor. There are four steps involved in the processing flow. They are: authorization, batching, settlement, and funding.

• Authorization is basically the approval of a transaction from the card issuer. Once a cardholder’s information is submitted for payment, it travels to the merchant’s acquirer network. From the acquirer’s network, the information is sent to the card issuer for authorization. The card issuer looks for validity of the card number, and ensures there are adequate funds to cover the transaction. Once approved, the issuer sends back an authorization number for the transaction. The entire process takes around 3 seconds. The sale is complete, but there has been no exchange of money.
• Batching is the storing of all authorized transactions. Batches are stored on the merchant’s equipment as memory. The merchant must send the batched transactions to the acquirer before payment can be made. This is also known as “clearing the batch.” Most merchants clear their batch at the end of each business day.
• Settlement occurs when the acquirer sends the entire batch through the card association to the card issuers for payment. Issuers make payment for authorized transactions directly to the acquirer through the Federal Reserve Bank’s Automated Clearing House (ACH).
• Funding of transaction monies occurs after the acquirer has received payment from the card issuer. The merchant receives the transaction amount(s) minus the discount rate, which is the fee the merchant pays the acquirer for processing the transaction. The discount rate includes fees paid to card associations and card issuers.

The process flow, from beginning to end, takes about three days.

Americans spend trillions of dollars using their plastic payment cards each year with debit card usage steadily rising. Businesses must offer their customers the ability to pay with a credit (or debit) card in order to capture this revenue. Accepting credit cards requires a merchant account and processing equipment that records cardholder data for submission to the network.

Read the original article at: http://www.associatedcontent.com/article/5478608/credit_card_processing_how_it_works.html?singlepage=true&cat=3