How is Credit card Processing carried out?

Credit card information online is very prominent today. It seems that everyone has advice to give. But often the advice is misguided or incorrect, or even part of a scam. Seeking out the solid information can be tedious and tiring. This article provides clear simple advice regarding the basics of credit card processing.

What is a credit card?

All businesses accept credit cards today. Unfortunately many people have no idea how credit cards work. We will start off by explaining a credit card.

• A credit card is a special type of payment card that is connected to a revolving line of credit.
• Credit cards have a specified credit limit. The limit is on the amount you can borrow.
• You will have to pay extra charges if you are not able to pay the full balance.
• You can make credit purchases or even borrow money from the creditor through a credit card.

Physically, a credit card is a small plastic card that contains a magnetic strip or chip. Credit card account information is encoded on the strip and is read when scanned through credit card readers by a merchant. The user then signs a receipt which indicates that they agree to pay the amount to the creditor.

Who issues credit cards?

Credit cards are issued by businessman and individuals. They may be banks, credit unions, department stores, clubs, savings and loans companies or gas companies or employees and professionals. The most widely accepted types of credit cards are Visa and Master Cards. Visa and Master Cards are issued through a variety of financial institutions. American Express and the Discover card are two other highly accepted cards. Consumers can find additional credit card information online.

Another type of credit card is the store or club card. Club and store credit cards are different from the major credit cards as they can only be used in a particular store or club. Many department stores offer store card with special promotions. The idea is to lure consumers to shop in their particular store.

How are credit cards processed?

There are 5 steps that occur when a credit card is being processed.

• The cardholder uses their credit card to purchase goods or services from a merchant who accepts credit cards. They present the card to the merchant.
• In the second step, the merchant sends the payment to an “acquirer.” The “acquirer” then pays the merchant for the cost of the transaction, except for a discount fee.
  • An acquirer is a business that is licensed by the credit card company.
  • The acquirer screens and enrolls merchants in the bankcard program.
  • An acquirer is also responsible for processing transactions and completing their financial settlement.
• Using the credit card interchange system (like Visa), the acquirer sends the transaction details to financial institution that issued the credit card.
• The issuing bank remits payment, after deducting the interchange fee, to the acquirer through the credit card settlement system.
• The cardholder is then billed for the goods and services that were originally purchased. It is submitted to the issuer.

A Real World Example of Credit Card Processing

In this example, Bob is an individual interested in obtaining and using a Visa card. Bob applies for a Visa card through XYZ Bank. His credit limit is $1,000. Bob decides that he would like to use his new Visa card to purchase a big screen TV that costs $950.

• Bob goes to the TV Warehouse which accepts Visa cards, finds the television that he wants to purchase and proceeds to check out. The clerk swipes the card.
• TV Warehouse's acquirer, ABC Bank, screens and approves the transaction. ABC Bank pays TV Warehouse the cost of the transaction, after deducting the customary fees.
• Using the Visa system, ABC bank sends the payment to the issuing bank. Inthis case it is XYZ Bank.
• XYZ Bank remits payment, deducts a small fee, and sends it to ABC Bank.
• Bob receives his XYZ Bank credit card bill in the mail. He sends payment for the total amount of the original purchase to XYZ Bank. This completes the transaction.

To adapt to a unique global marketplace, merchants have started conducting these transactions in person, over the phone, on the internet and through mail. The availability and ease of use along with the ever growing number of businesses that accept credit cards will only continue the growth of the credit card industry thereby making them an important commodity in life. As a result, it is imperative that consumers know how to use credit cards and where to find credit card information online. There is no training or special skills required to know this. All that one needs to know is fundamental banking operations.

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