How does a credit card work?
A credit card works a lot like a CD (you know, that thing people used before iPods came out). When you put a CD into a CD player, the reader in the machine analyzes codes on the back of the CD. In the end, you hear music, voices, or other sounds. With a credit card, the magnetic strip on the back of the card contains coded information about the card itself. When you swipe your card at a register, the card reader picks up on that information to identify the card.
In some cases, you don’t actually have to swipe your card to use it. You may use your credit card number, expiration date, and CVV code to identify the card. Some websites and businesses will also ask for the zip code for the billing address, which is something that is not visible on the outside of the card. They do this to prevent someone else from stealing and using your credit card.
Credit Card Processing
We could make a whole book about credit card processing, but we’ll try to keep this simple. When you swipe a credit card, your account information is passed through several companies in a matter of seconds. The basic steps of the process are as follows:
Step 1 - Authorization
This is the only step that happens while you are at the register. The merchant you make a purchase through will send your credit card information to an acquirer, which is the messenger between the merchant and the credit card company. The acquirer sends the request to an issuer or a set of issuers, which would be the credit card company and/or the issuing bank. If the issuer says you have enough money in your account, it will give the acquirer permission to run the card. Then the acquirer will give approval to the merchant.
Long story short, someone asks if your card is good to go, and then someone else answers yes or no.
Step 2 - Batching
At the end of the night, a merchant will gather all of the transactions from the day and put them into a “batch.” This batch is re-sent to the acquirer, who then passes the information through to the issuers. This is all done so the merchant can get money from the credit card companies and banks.
Step 3 - Clearing
Once the issuers assess the batches, they will take out whatever their fees are and send the rest of the money to the acquirer. This step is called “clearing” because the issuers have to clear the funds to send out. Most of these funds will ultimately go to the merchant.
Step 4 - Funding
This is the last step of the process, where the merchant finally gets its money. The acquirer will take out a small portion of the money to cover its expenses, and then it will send all the rest to the merchant. At this time, your credit card is officially charged for the purchase, and you should see the money clear your account.