How Does Credit Card Processing for Businesses Work?

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How does credit card processing for businesses work? We break down the basics in this can’t-miss guide for business owners.

How Does Credit Card Processing Work?

Did you know that Americans own almost 520 million credit card accounts? Yep, and those accounts are responsible for up to about 4 trillion dollars in spending every year.

If you’re a small business owner, you probably want to get your hands on a chunk of that change, but you might not know how to do it. What you need is credit card processing for businesses.

Setting up credit card processing can seem daunting at first. That’s why we’ve laid out all the credit card processing basics you need to know to get started.

From understanding what credit card processing actually is, to learn about the steps involved in each transaction, we’ve got your back in this detailed guide. Read on!

What is Credit Card Processing?

Simply put, credit card processing is the action of turning your customers’ swipes into dollars in your bank account.

It starts with one of those magical little pieces of plastic we call Visas and Mastercards, and it ends with the merchant’s acceptance of the payment.

What happens in between is where it gets a little complex. To better understand this process, you must first understand who is involved.

Who is Involved in Credit Card Processing for Businesses?

There may be up to eight involved parties in every credit card transaction. They are as follows:

  • cardholder
  • merchant
  • merchant bank
  • payment processor
  • independent sales organizations (ISO’s)
  • Membership service providers (MSPs)
  • cardholder bank
  • card association

Below, we’ll break down who each of these parties is. You’ll also learn about the role each plays in the transaction process.

The Cardholder

The cardholder is the person doing the purchasing. This is your customer!

The Merchant

The business accepting the payment is known as the merchant. This is your business!

In order to accept credit card payments, the merchant must have the hardware and software for credit card processing.

The Merchant Bank

A business must have an account that is able to accept credit card payments. The bank where this account is located is known as the merchant bank.

The Payment Processor/Credit Card Processor

The payment processor, also known as the acquiring processor, is the party that does the actual processing of the payment. This may be the merchant bank itself, but often it is a third-party company that provides the hardware and software required for processing.

Having a third-party payment processor can help ensure a smooth transaction process.

Independent Sales Organizations and Membership Service Providers

Often abbreviated to their initials (ISO and MSP), these are third-party service providers who work for merchant banks. Their job is to make sure the bank’s role in credit card processing works.

Cardholder Bank

The cardholder bank is a key player in the transaction process. That’s because the cardholder has an account there, which allows the bank to supply credit.

Without a bank account to back them up, a cardholder would not be able to make a purchase.

Card Associations

Card associations are major card brands like Visa, Mastercard, Discover, and American Express. Below, we’ll address exactly how card associations are involved.

For now, it is important to know that they set the rules for payment processes.

How Does Credit Card Processing Work?

Have you ever wondered what actually happens when you swipe a credit card? Now that you know about all of the parties involved, you might not be so surprised to learn that the transaction itself is a somewhat complex process.

There are three major steps to credit card processing for businesses, which are:

  • authorization
  • authentication
  • settlement

Below, each of these three steps is broken down in detail.

Step One: Authorization

Though complex, the authorization step takes place in a matter of seconds more than a billion times every day across the U.S.

During authorization, the cardholder submits their card information to the merchant. In other words, they swipe their card.

As soon as this happens, an authorization request is sent to the payment processor, who forwards the request to the card association, who forwards it one more time to the issuing bank.

The issuing bank will either approve or deny the request. The approval or denial then gets sent back in the exact opposite order, meaning it travels from the issuing bank, back to the card association, back to the payment processor, and finally to the merchant, who informs the cardholder of the result.

Step Two: Authentication

The authentication process is set into motion after authorization is complete. It starts with the credit card association, which requests payment authorization from the issuing bank.

The issuing bank then confirms the credit card number of the cardholder and makes sure they have funds available to complete the transaction.

If approved, the issuing bank lets the merchant know through the merchant bank or third-party processor.

Step Three: Settlement

Settlement is the final step in the credit card processing procedure. This happens when the merchant actually receives the funds from the cardholder.

Settlement begins at the end of each business day when the merchant sends the day’s approvals to the merchant bank or payment processor, who forwards this information to the appropriate credit associations.

The credit associations then forward this request to each cardholder bank. In 1-2 business days, the cardholder bank transfers the correct amount of funds to the credit association, which finally sends the funds to the merchant bank. That, in total, is how credit card processing for businesses works.

Simplifying Credit Card Processing for Small Businesses

Learning how credit card processing for businesses works can be a lot. Does this all seem a little confusing? If it does, don’t worry!

Credit card processing for businesses is a complicated process, but it doesn’t have to be complicated for you. Payline Data is the ultimate payment processor for small businesses.

When you sign up for credit card processing with Payline, you get a dedicated account manager who will help you get up to speed on all of the exciting tools we have to offer.

Plus, your first month is free. So don’t wait. Swipes are happening all around you and your business is not keeping up if you don’t have the ability to process credit cards.

Sign up today!

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