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How Credit Card Payment Processing and its System



How Credit Card Payment Processing and its System

Almost all kinds of businesses including e-commerce platforms that conduct online business accept credit card and debit card payments at random. The convenience of payments by using credit cards and debit cards allows complete flexibility for consumers who can engage in any buying transactions either in-store buying or online buying. Naturally, businesses have to accept card payments that constitute the majority of sales transactions. While consumers are relieved of handling cash during buying, business owners must wait for some time for the money to reach their bank, that too after deducting some fees for the transaction. The credit card payment processing company responsible for converting card transactions into cash and then depositing it into the bank account of businesses charges some fees known as credit card processing fees.

Although the credit card processing fees might appear very small ranging between 1% and 3% or somewhere around it, the cumulative effect on the transactions can run into a few thousand dollars. And this is what ails business owners as it eats into their profit.  Although businesses accept both credit card and debit card payments, they would be better off in accepting debit card payments where the processing fees are much lower, but then consumers are too much fond of using credit cards. Therefore, businesses are eager to neutralize the effects of paying the credit card processing fees by availing the services of companies like so that their profit remains intact.

Before trying to find ways of reducing or eliminating credit card processing fees, it is important to understand how the payment processing for credit cards work.  The better you understand the process easier it would become to adopt suitable strategies to take home the entire profit by availing free credit card processing.

Let us start by knowing the stakeholders in the credit card processing cycle.


Parties involved in credit card processing

Although any sales transaction happens between the buyer and seller, payment processing of credit cards and debit cards include many parties that facilitate the process.

  • Cardholder

    The person or business organization that has a credit card and or debit card issued in their name by an issuing bank is the cardholder. The card replaces physical currency and is useful for any sales transaction.

  • Merchant

    In the credit card industry, businesses have another name called merchants that accept credit card or debit card payments in return for goods and or services. Any business that accepts credit card payments is a merchant.

  • Merchant bank

    Every business has a banker which the credit card industry identifies as merchant banker that maintains the business account. Merchant banks allow depositing the money received from credit card or debit card transactions.

  • Payment processors

    During credit or debit card transactions an intermediary company processes the payments which are known as a payment processor.

  • Card associations

    Various brands of cards that you see in the market like MasterCard, Visa, American Express, and Discover, etc. are known as card associations that act as clearinghouses for their brands. They also act as governing bodies of payment processing. The card associations are responsible for setting the guidelines of card usage and qualification as well the interchange rates and play the role of an arbitrator between acquiring banks and issuing banks.

  • Issuing banks

    The card associations do not issue cards to consumers directly but involve some financial institutions, credit unions and banks to deal with consumers. For any issues with credit cards or debit cards, consumers interact with issuing banks and not card associations.


Credit card processing

Credit card processing is an elaborate chain of events that consist of three distinct phases – authorization, settlement, and funding.


On buying some goods or service, the cardholder presents the credit card or debit card to the merchant who then swipes the card or dips it in the device, depending on the type of card and sends a request to the payment processor for authorizing the transaction for payment. In case of a physical store, the merchant uses a point of sale system or credit card terminal to raise the request. E-commerce payments use payment gateways, and there are mobile payment acceptance methods too.  The payment processor forwards the request to the issuing bank via card associations.   The issuing bank would first check the card holder’s account status, available balance, and other factors and then accept or decline the request by sending a message to the merchant.

Settlement and funding

At the end of each business day, merchants would send batches of authorized transactions to the payment processor by using an automated system. The payment processor forwards the request to the respective card association which in turn takes it up with the issuing bank by communicating the appropriate debit.  After charging the card holder’s account for the authorized amount of transactions the issuing bank transfers that amount to the merchant bank after deducting the fees for the transaction. The merchant bank then credits the amount in the merchant account.

From the above process, it is now clear that the payment processor acts as a link man in the entire process and provides the essential service of communicating between the stakeholders to ensure smooth and timely release of payment to merchants.  From authorization to settlement and funding, payment processors have a role to play in each phase of payment processing and therefore charge fees for providing the services.

There is no way that you can avoid payment of fees because it remains built into the system. Indeed, the fee structure varies between businesses as credit card processors consider many factors like the volume of transactions, type, and age of business, risks involved, etc., to determine the fees and you can always negotiate to keep it at minimum.

As long as you accept credit card payments, you must pay card processing fees, and no fee waiver is possible, but still, you can counter its effects by taking some steps to create a win-win situation for you and customers so that it does not impact your revenue.

Vergis Eva is an experienced blogger who has written articles for several renowned blogs and websites about various uses of social media to engineer more business traffic on business websites.