How does credit card processing work?
Credit cards are an extremely important part of modern life. Access to a credit card makes life easier in many ways for the credit card holder. A credit card user can avoid carrying large amounts of cash that may easily get lost as they go about their business. Credit cards also allow people accomplish other important financial tasks.
People can use the credit card to earn points for merchandise or even cash if they charge a certain amount during a given period. People can also use the card to buy items and pay them off in small amounts, thus helping to build a strong credit history. A good credit history is vitally important in many areas of life including applying for many jobs and renting an apartment or buying a house.
While many people are aware of such advantages, they are not entirely aware of exactly how credit card processing works when they go to buy something in a store. The process has four basic steps: authorization, batching, clearing and funding. While some aspects of each step may differ from place to place, the general process is the same in all areas.
Authorization is the first step. During this step, the person holding the credit card asks to buy a product or service from a retailer or other merchant. The person’s request is then submitted by the merchant to the authorization agency or acquirer that is in charge of processing the credit card transaction. The agency will then ask the bank or credit card agency authorizing the card if the person holding the card has valid credit. If this is true, the authorizer will grant permission for the person with the card to buy the product.
Batching takes place at the end of the day. Each individual merchant gathers up the day’s receipts in a batch. The batch is then sent to the acquirer. Batches may be sent to multiple acquirers if necessary. Sometimes stores find this is necessary as different credit cards have been used during the day’s transactions. But most merchants use a single acquirer for all their credit card processing work.
Clearing takes place as the batch is sent to the acquirer to ask for payment. The card network sends each transaction to the appropriate card network. The issuer will charge small fees known as interchange fees for each purchase made. Interchange fees vary from card to card but are generally one percent of the value of the purchase price. The credit card company then sends the remaining amount of the purchase price to the acquirer.
The last step is known is funding. Funding is when the merchant gets paid. The acquirer adds what is known as a discount fee to the purchase. A discount fee is a small sum that the acquiring bank takes to offset the cost of processing the transaction. After that step is completed, the merchant is paid for the purchases buyers have bought with their credit cards.