Within the credit card processors ecosystem, there’s a lot of complex moving pieces that make the dynamic world of payment processing possible.
For businesses concerned about growing their revenues, attracting new customers and marketing their products on a day-to-day basis, there isn’t a lot of room to stop and think about how a credit card processor actually works. From the first point of customer payment interaction, the time a payment makes its way into a merchant’s account, there’s a lot of little nuances that make the transaction possible.
To make your life easier, we’ve broken down the ins and outs of who a credit card processor is, who all the players are, how everything works, and how transactions work amongst all the key players. This educational piece is designed to help you, as a business owner, get informed about how credit card processors and merchant services work, without worrying about getting bogged down by the nitty-gritty details that don’t matter to your cash flow.
Credit Card Processors 101: Inside the Transaction
Credit card processors are the core piece of the payment puzzle involved in completing a transaction between consumers, merchants, processors, and banks. Transaction information flows across a business’ payment terminal or software to enable the transaction to continue. From there, the transaction passes through the card network to the issuing bank. That’s just the start of the process.
Once that initial step is complete, the issuing bank authorizes the transaction through the card network and back through the payment processor — allowing a business to permit the transaction. All of this happens in a matter of seconds to enable a smooth transaction. Of course, this is the simple version of what really happens while credit card processors are at work.
Your credit card processors are in charge of everything that relates to your customer’s data. Since a payment processor manages how the payment data is shared between a merchant and the card issuer, there’s a lot at stake when choosing the right credit card processor. The processor is responsible for getting data from point A to point B securely, in order for a payment to be properly authorized and approved for settlement.
The Key Players in the Credit Card Processors Relationship
Far beyond the merchant and the customer, there are many key players that make the function of a credit card processor possible. Each of these is interconnected in how they matter to the overall payment relationship, but each still plays their own independent role in ensuring a transaction goes smoothly.
These relationships are also guided by businesses own payment industry partners. For example, Payline provides credit card processing to businesses of all sizes and is designed to enable better credit card processing relationships between each of these key players.
- Cardholder: The customer triggers the start of the payment process when making a transaction. Errors with the cardholder can occur when they are using an outdated card or card with inaccurate information. The cardholder has little control over the payment process but it the most important party for the business owner to care about.
- Merchant: The merchant plays the relationship facilitating role over the credit card processor relationship. The merchant is in charge of having the right processor in place to creates a seamless transaction. The merchant is also in charge of maintaining their relationships with their own payments partners to allow for transactions to move smoothly across their systems.
- Acquiring Bank: This is the financial institution that acts on behalf of the merchant to process credit card payments. The acquiring bank is the key piece in the merchant relationship that enables them to accept credit cards from the issuing bank partners (AKA, the credit card networks).
- Issuing Bank: The issuing bank is the bank or financial institution that offers a specific branded payment card to the consumer. These are the card association brands that dominate the payment world: Visa, MasterCard, Discover and American Express.
- Card Networks: As referenced above, these are the credit card companies that issuing their branded cards to financial institutions, or directly to consumers, in order to allow for credit card relationships to exist. These networks facilitate how transactions occur between merchants and the card issuers.
What Credit Card Processing Involves
Within each credit card transaction, there are three key components that enable a customer to make a payment that is properly submitted to a merchant for payment. These steps include Authorization, settlement, and funding. Each step is equally important in ensuring a payment is processed correctly, and with little chance for errors. Not having a solid payment processing relationship with the right credit card processor could cause a strain on your business and your customers.
By understanding how each of these steps in the credit card processing equation works, businesses leaders can gain a better sense of how funds flow across their system, and how they can ensure payments are completed in a timely and secure fashion. Credit card processors are the key cog in the very complicated electronic payment equation. Given the right payment processing partner, businesses are equipped to process payments in a way that benefits you and your core customer base.
Step 1: Authorization
This critical first step in the credit card processor equation is all about approving or denying a customer’s credit card. This includes determining if they have proper funds, or enough available credit, to enable this purchase. A credit card processor is designed to flag that information in order to send the payment to the next step.
Of course, this process is far more complex than it appears. For a credit card processor to complete the first task in its job, it must rely on its processing software to send the transaction request to the card issuer. The card issuer essentially approves or denies the transaction. If approved, the processor receives an authorization number. For rejected transactions, they receive a reason code specifying why the card was declined. This process happens in a matter of seconds as to not disturb the customer relationship.
Step 2: Settlement
The next step that allows credit card processors to complete their task comes after a customer’s credit card has been approved by the card issuer — and cleared across the merchant’s payment systems — to enable a payment to continue. This means the sale is one step closer to being complete. Still, the payment process isn’t quite finished.
What’s needed here is the clearing and funding of a payment. This involves a merchant sending an approved transaction to the card issuer’s bank, or payment network, for final approval. In a credit card transaction, the issuer approved the funding on the transaction based on the balance in the cardholder’s account. The customer’s issuing bank receives a request and approves a payment to be made to the merchant. This allows a transaction to post to a cardholder’s account.
Step 3: Funding
This final step is more or less the end of the transaction (as long as it’s not disputed later by the cardholder…but that’s a topic for another day). The transaction has been authorized and settled and is ready for the funds to be transacted across the credit card processor to send the merchant funds. By this stage, merchants can rest easy knowing the payment is complete and a transaction with the customer has been finalized.
Credit Card Processors: Bringing the Pieces Back Together
Now that you’ve got a clearer understanding of who are the key players are in a credit card transaction, and the inner workings of a credit card processor relationship itself, this leaves just one last question: How do each of these relationships work together?
What powers a positive credit card processor relationship is all about the partnerships businesses owners establish within the payments ecosystems to empower better, faster, more secure transactions to occur across their systems — and with their customers. Making credit card processing easier is done by having the right hardware, software and enablement partner to make the entire process seamless for your business. The easier the transaction process is for your business, the easier it will be to complete transactions with your customers.
Given the right payment enablement partner to streamline the credit card processor integration, this can create a better relationship between each of the key payment players mentioned above. A positive payment process leaves your customers happier and gets you paid faster, which has a domino effect on the rest of the payments equation. Happy customers are more likely to come back to your business, and spend money on the credit cards issued on behalf of, the other key players. This is how the credit card processor relationship comes full circle.
This leaves merchants better positioned to do business with customers, which allows them to create longer-lasting relationships without unnecessary friction in the payment process.
Anna Kragie is a content contributor for Payline Data. She previously wrote for PYMNTS.com, as a Sr. Content Producer, where she focused on financial services and payments innovation, fraud and security, emerging payments, and FinTech news, research and thought-leadership content across the payments industry.