How Are Credit Card Transactions Processed?

Credit card transactions are processed through a series of steps involving multiple parties, including the cardholder, the merchant, payment processors, and card networks. 

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Here’s a quick overview of how it all works:

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Step One: The Cardholder Initiates a Transaction

The transaction begins when a cardholder makes a purchase using a credit card. The cardholder provides the card information, which includes the card number, expiration date, and sometimes a CVV (Card Verification Value) code, to the merchant.

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Step Two: The Merchant Requests Authorization

Next, the merchant sends the transaction details, including the card information and transaction amount, to its payment processing provider. This provider could be a merchant account provider, a payment gateway, or a payment processor.

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Step Three: The Payment Processor Sends an Authorization Request

The payment processor then forwards the authorization request to the card network, such as Visa, Mastercard, or American Express, associated with the card.

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Step Four: The Card Network Routes the Request

Next, the card network routes the authorization request to the card issuer. The issuer reviews the request to determine if the cardholder has sufficient credit or funds available for the transaction.

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Based on that information, the card issuer evaluates the authorization request and decides to approve or decline the transaction. 

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Step Five: The Merchant Receives an Authorization Response

The authorization response (either approval or decline) is sent back to the merchant via the payment processor. Merchants receive an approval code for all approved transactions. 

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Step Six: The Merchant Completes The Transaction

With the authorization code in hand, the merchant completes the transaction, and the cardholder's purchase is approved. The cardholder may be asked to sign a receipt or enter a PIN, depending on the transaction type.

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Step Seven: Settlement and Batch Processing

At the end of each business day, the merchant accumulates all approved transactions into a batch. The payment processor sends this batch to the acquiring bank (merchant's bank), which credits the merchant's account for the approved transactions.

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Step Eight: Payment Processing Fees

The merchant pays processing fees to the payment processor and, indirectly, to the card networks and issuer for each transaction. These fees are typically a combination of a percentage of the transaction amount and a fixed per-transaction fee.

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While this is a multi-step process, it happens quickly and is usually completed within seconds.  It's important to note that while this is a general process, variations exist based on specific circumstances, card types, and payment methods.

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