How Credit Card Processing Works

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Ever wonder how the money from your credit card account gets to the store you bought something from? How about those mysterious transaction fees that seem to raise the costs for just about everything? This is all a part of the universal procedure known as credit card processing, which takes information from your card and converts it to actual money for a merchant.

To make things a little more understandable, we have highlighted the major steps in credit card processing so you can see how it works. Read on to see what goes into every transaction made on your card.


Before we begin, we need to go over some of the "lingo" you might see in the steps that follow. Here are some definitions to keep in mind:

  • Merchant: A store or service provider you are trying to make a purchase with.
  • Acquirer: A third party business that acts as a messenger between the merchant and the credit card companies.
  • Issuer: The entity that provides the funds for a credit card. This may be a combination of a credit card provider like Visa and a banking institution like Chase.
  • Buyer: You, or any other person who may be using a credit card.

Now that we've that out of the way, let's get to the credit card processing overview.

Step 1: Authorization


The authorization process happens in a matter of seconds, giving the merchant the go-ahead to hand over something you want to buy. It starts when you swipe your credit card, sending a signal to the acquirer that says you want to make a purchase. The acquirer asks the credit card issuer if you have the funds to support the transaction. If you do not have enough money available in your account, the issuer will tell the acquirer to deny the charge. Then the acquirer will pass the information along to the merchant stating you are approved or disapproved for that purchase.

Step 2: Batching

BatchingThe batching process happens after you have already gone home with your item. In this step, the merchant will gather all of the transactions from the day and compile them into a "batch." That batch is then sent to the acquirer, who will then send the files to the appropriate parties. This is all done so the merchant can receive funding from the card issuer(s).

Step 3: Clearing

The batch amount does not represent the actual money that a merchant will be paid. First, the issuer has to account Clearingfor the interchange fee, an amount that the merchant has to pay to the credit card company, which accounts for the majority of credit card processing fees. This fee will vary by issuer, but it is usually around 2% of the transaction. Thus if you made a $100 purchase at a store, $2 of that would go to the issuer and $98 would go back to the merchant. The interchange fees are taken out before the merchant's money is released.

Step 4: Funding

FundingThis is the step where the merchant finally receives his money. There is one final fee that has to come out of the cleared amount, the discount rate. This is money that covers the acquirer's efforts in the process. Discount rates, like interchange fees, will vary by company, but they are usually less than 1%. After all the steps are complete, the merchant will get funds from the acquirer to cover your transaction. You will also be billed for the transaction, which you can pay as needed.

Note that these basic steps happen for online transactions just like they would in-person transactions. Credit cards processed through Square and other non-traditional devices face a similar situation. The only difference is the amount of money charged along the way.

How the Processing World May Change

Credit card processing as a whole has pretty much been set in stone for decades now, but a new law known as the Durbin Amendment may change all of that. Essentially this amendment is going to put a cap on the money that big banks charge in interchange fees. This will save stores money, which should, in theory, save consumers money. The problem is that this ruling does not apply to small banks, and merchants that are seeing a cost cut aren't reducing their prices at all. In fact, some of them are raising their costs because large banks are finding ways around the ruling. They charge more for a fee outside of interchange (usually labeled in the miscellaneous fees at the end of a statement), and stores have no choice but to cover the costs.

If you notice an unexpected price increase at one of your favorite stores, this may be the cause of it. The amendment won't fully be in effect until May 2013, but aspects of it have already hit the processing world. The steps involved with the process haven't changed, but the fees associated with them have. This is something you have to keep in mind.


Now that you know how credit card processing works, you may have a better understanding for the random fees you get charged from time to time. Don't let this stop you from using your credit cards, as there are fees with just about every payment option nowadays, which the merchant absorbs most of anyway.


Payment Process Overview Credit Card Transaction Processing Basics

How It Works Diagram

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.

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