Ever wondered how credit cards work? Most of us own a card but not many understand how they work. There is an intricate process that takes place behind the scene to allow you to transact within minutes.
Here is a list of entities involved in every card transaction.
- The customer
- The merchant
- Merchant’s bank
- Credit card issuer
Stepwise Credit Card Transactions
- Step 1- Swiping
- Step 2 – Authorization
- Step 3 – Approval
- Step 4 – Processing
- Step 5 – Credit card charges
- Step 6 – Merchant payment
- Step 7 – Billing
The first step of a credit transaction is swiping your card. If you wish to pay a merchant via credit card, you will have to swipe your credit card with the merchant. This will communicate with the merchant bank. The bank will then see if this charge can be approved.
The bank that the merchant is linked with then contacts the payment gateway (Visa, Mastercard, etc.) to authorize this purchase. However, some payment networks like Discover and American Express authorize transactions themselves as the card issuer and the payment network.
The card issuer then sends a code for the transaction and in case its declined, you’ll have to contact the issuer directly to figure out the reason.
The merchant bank then approves the transaction. Post this, you will get a receipt for the payment. However, this does not mean that the merchant has been paid yet. Your card hasn’t even been charged yet. If you check your account statement right after a purchase, you will realize that it hasn’t been recorded.
At the end of the working day, the merchant then collects all the credit card payment receipts and sends it to the bank. The bank then sends these receipts to their appropriate payment network to process these charges.
The card network then communicates to the issuer with regards to the due payments. The card issuer then keeps a certain percentage of the fee as per their agreement. In case of American Express and Discover, they keep a higher percentage of the fee since they are both the credit card network and the credit card issuer.
After the credit card company has kept a certain fee for themselves (usually 2%), they transfer the remaining amount to the merchant. The bank linked to the merchant’s account then collects this fee before depositing it to his/her account.
Some card issuers bill the customer after the charges have been deposited. In this case, the customer has the option to pay the entire bill at once, or he can pay it partially. If the merchant chooses to pay it partially, he/she will have to pay interest on the remaining amount.