How Credit Card Processing Works

Have you ever looked at the credit card terminal in your store or restaurant and wondered, “How does this all work?” Few people have, but it’s a pretty incredible system if you stop and think about it. Someone swipes a piece of plastic in your physical location, and the money is sent from their bank to yours in a matter of seconds. People 100 years ago would never have dreamed it would be possible!

Understanding how credit card processing works is important if you’re looking for a good processing system or payment provider. It’s good to learn which stages of the processing process incur fees, and it may enable you to save big on your credit card processing service.

Here’s how it works:

The cardholder (client) obtains a bank card—either credit or debit—from the financial institution where they store their money. That bank card is presented to the merchant (you) in payment for whatever goods or services you are offering.

To accept the card, the merchant must have access to a credit card processing terminal or system. This is a system that reads the information on the credit card when it is inserted (chipped card) or swiped (basic bank cards).

When the bank card is used to make a purchase, the credit card processing system accessing the cardholder’s bank account or credit account from their issuing bank. The issuing bank (which gives the cardholder the bank card) will have an agreement with one of the card associations (Visa, Discover, MasterCard, AmEx, etc.). That card association will establish the link between the issuing bank (client’s) and the acquiring bank (merchant’s). The money will be electronically transferred from the cardholder’s account to that of the merchant. With the signature and the entry of the PIN number, the cardholder is proving to the merchant and the credit card processing system that they are the person authorized to use that bank card.

The money is deposited into the merchant’s bank account. If a debit card is used, the money is deducted from the available balance in the cardholder’s account. If a credit card is used, a debt is incurred and the cardholder has a set period of time to repay the credit card company/issuing bank.
It’s a surprisingly complicated system, yet one we’ve come to take for granted. We swipe our credit card many times every day, never once thinking about all the moving pieces that have to come together to make the financial system work. A true marvel of modern technology!

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