What are the steps of credit card processing? and What is a Payment Processor?
“Credit card processing involves several steps to complete a transaction securely and efficiently. Here are the typical “steps in the credit card processing process”:
Authorization: The customer provides their “credit card information”, including the card number, expiration date, and security code (CVV).
The merchant’s point-of-sale (POS) system or e-commerce platform sends the transaction details to the payment gateway, which acts as an intermediary between the merchant and the cardholder’s bank.
Authentication: The payment gateway forwards the transaction information to the cardholder’s bank (issuing bank) for authorization.
The issuing bank performs several checks, including verifying the card’s validity, checking for available funds, and confirming the transaction is not flagged for suspicious activity.
Approval/Denial: The issuing bank either approves or denies the transaction.
If approved, the issuing bank sets aside the authorized funds for the transaction.
Authorization Response: The issuing bank sends an authorization response to the payment gateway, indicating whether the transaction is approved or declined.
The response includes a unique authorization code if the transaction is approved.
Settlement: The approved transaction data, along with the authorization code, is sent to the merchant’s acquiring bank (also known as the acquiring institution).
Clearing: The acquiring bank sends the transaction data to the card network (e.g., Visa, MasterCard, American Express) to facilitate the clearing process.
The card network helps ensure that the transaction details are accurate and that the funds are transferred between the issuing and acquiring banks.
Funding: The acquiring bank transfers the funds to the merchant’s account, typically within a few business days.
Payment Processor’s Role: A “payment processor is a third-party company” that plays a crucial role in the credit card processing ecosystem. Payment processors facilitate the secure transfer of payment information between the merchant, the issuing bank, and the acquiring bank.
They often provide the payment gateway, which connects the merchant’s system to the card networks and banks.
Payment processors also offer services like fraud detection, encryption, and tokenization to enhance security.
In addition, they may handle other payment methods, including online wallets, digital payments, and electronic funds transfers.
Payment processors play a vital role in ensuring the “smooth and secure processing of credit card transactions”, and they charge merchants fees for their services, typically based on a percentage of each transaction or a flat fee.
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