How Credit Card Processing Works
From the end-user’s point of view, performing a credit card transaction is as easy as typing a number and pushing a button. But behind the scenes, numerous processes take place that can transport this information around the globe and back again to verify the cardholder’s bank information, check for fraud, approve the transaction and complete the transfer of money to your account.
The Pieces of the Puzzle
A shopping cart is a piece of computer software that allows your end users to easy and intuitively save products for purchase, choose payment and shipping options, and interface with your payment gateway to enter their credit card information. This is the only piece of the process that your shoppers ever see, which makes it strategically important as part of the overall user experience as well as a necessary portal to the rest of the process.
Your shopping cart must be compatible with both your website and your payment gateway. Not all carts support all gateways, and since the gateway is the piece that actually performs the processing, it’s usually best to secure this application first, before choosing your shopping cart.
A payment gateway is a service that relays credit card and bank account information back and forth between the payment network and the shopping cart and which authorizes the payment so your customer can complete the transaction. This service is necessary because merchants cannot directly access bank records or relay sensitive information. By using a payment gateway, merchants have the benefit of acting upon accurate information without having to see it and transmitting data in a secure fashion that protects consumers from internet hackers attempting to access the database or data stream.
Many payment gateways also support the addition of applications that compare the credit card and customer information against third-party databases and risk assessment criteria to combat fraud and reduce chargebacks.
Merchant Account (Payment Processor – Acquiring Bank)
When your payment gateway approves a transaction, the funds must be transferred from your customers bank to yours. However, your personal bank is unlikely to offer the kind of support you need. Instead, you need to set up an intermediate account – called a “merchant account” at a bank that specializes in processing credit card payments for your industry. Called the “acquiring bank,” this bank acts as a clearinghouse and temporary holding place for funds before they are transferred into your bank account.
Obtaining a merchant account requires an approval process and can be the most difficult piece of the puzzle to obtain, especially if you work in an industry that is traditionally considered high-risk. But due to the wealth of relationships we have with banks and payment processors across the country and around the world, E-Commerce 4 IM can help almost any merchant get the account they need to start accepting credit cards.
Visa, MasterCard, Discover, and American Express are the four major card associations in the United States, and play an integral role in credit card processing. When the acquiring bank (directly or through a third-party payment processor) receives an incoming transaction, it forwards it to the card association who either forwards it to the customer’s bank for approval (e.g. to see if there are sufficient funds) or checks and approves the transaction itself (i.e. Discover and American Express). Since these associations ultimately own the credit line, they lay down many of the rules you’ll be operating under, including the very important chargeback ratios, which strictly outlines how many chargebacks you can have per 100 transaction before your merchant account is penalized or terminated.
This is your customer’s bank and the entity that approves or declines the payment based on sufficiency of funds and risk scenarios.
Your Checking Account
At the end of the process comes the best part – money is transferred from your merchant account into your bank account where you can access it. The delay between the time it enters your merchant account and the time it hits your bank account is generally 1-3 days, but in some cases, it could take a longer or short amount of time, depending on the contract you have with your merchant bank.
Fortunately, all of these data transfers and approvals or denials happen within a matter of seconds, so your customer has no idea what goes on behind the scenes. But that doesn’t mean you shouldn’t because even though the whole is greater than the sum of its parts, it can greatly help your process and your bottom line to be able to understand, select, and manage each of these components for the benefit of your business.
And the best news is, you’re not alone! We specialize in helping you find a merchant account, which is the cornerstone of the process, but we can also help with payment gateway integration, shopping cart selection, fraud prevention, and more. Just give us a call today to see how we can help you at 1-800-570-1347.