How Credit Card Transactions Work: A Tutorial

One of many famous scenes in the mockumentary This Is Spinal Tap occurs when the band is trying to get from their dressing room to the stage and they end up getting lost in the hallways and corridors of the venue.

If you’ve ever wondered what happens after someone swipes a credit card—how, exactly, does the payments process work?—then chances are you’d get just as lost as Spinal Tap trying to figure out what’s what. It’s a complex and confusing process.

There are a lot of hands in the proverbial cookie jar when it comes to the credit card payments process (note: that things are a bit different for debit cards). Understanding how the process works puts you in a better position if something goes wrong and enables you to resolve issues faster by going directly to the root cause. As a business your goal is to get as many payments completed as possible and you don’t want to waste valuable time figuring this stuff out after the fact.

The Load In: Know The Pieces

There are six different touch points in the payments process.

1. Acquirers: These are the infrastructure companies and oftentimes banks. They help get merchants set up in the payments process. This includes providing point of sale (POS) terminals.
2. Processors: These companies are responsible for actually transmitting transaction data between different entities in the payments process. Some acquirers double as their own processors.
3. Card Issuers: Again these are banks, but these are the ones who manage the credit and debits on credit card accounts. Some banks function as all three, acquirers, processors, and issuers, but there are enough different issuers that don’t perform those other functions to keep them as a separate category. The main point here is to understand what role(s) your bank plays in your payment process.
4. Card Networks: The two big card networks are Visa and Mastercard in the states. These companies function like traffic cops in the payment process directing information between different entities. They also set rules and fees around card usage, including things like the PCI-DSS security standard.
5. Infrastructure Middlemen: Acquirers tend to deal with sure bets in order to mitigate risk. However, there are tons of small businesses that need merchant infrastructure for accepting payments. The companies that provide these services to other merchants that acquirers won’t are basically infrastructure middlemen. They tend to work directly with the card networks to get merchants up and running.
6. Payment Gateways: These are interfaces for processing payments online or over the phone. Essentially if you don’t have a brick and mortar store and don’t physically process credit cards, you’d need a payment gateway for each channel you use to process credit cards. Processors may provide a payment gateway to a merchants.

Of course, there’s always the caveat that some bigger companies might control multiple roles in the process, but when thinking about a typical credit card payment, the process generally looks like what we’re talking about here.

The Set Opener: Getting the “All Clear”

Is there a more frustrating message to hear when making a payment than “card denied”? Without authorization you’re stuck between a rock and a hard place. Before any money is moved, a payee needs their card authorized to make the transaction at hand. Here’s what that process looks like:

1. Customer swipes their card at the POS terminal or enters it into a phone self-service gateway to request permission on behalf of the merchant.
2. The merchant then passes the request on to the acquirer and the processors.
3. The acquirers and processes pass the request on to the card network (e.g. Visa, Mastercard).
4. The card network then passes the request to the bank that issued the card. Here is where the card is checked against fraud activity, account balance, etc. The issuing bank approves or denies the request, and the decision is then relayed back downstream.

The whole process only takes a few seconds. At this point no one has moved any funds, the merchant simply received permission to charge the payees card for the amount requested.

The Full Set list: Batches

As you can imagine, processing every single transaction as it happens isn’t the most efficient way to go about moving money around. It does happen sometimes, notably with debit cards, but those are a slightly different animal.

We’re talking about credit cards here, and what happens is that a merchant compiles all their transactions at the end of the day and aggregates them into a single batch. This batch of files follows the same upstream chain that the authorization request does.

The primary difference is that the batch file includes transactions from a ton of different card issuers. Once the batch hits the card network, Visa, for example, then breaks the batch down into its component card issuers and sends each bank the transactions its responsible for.

It’s hours after the original transaction took place and the money still isn’t moving yet.

Gimme Some Money

Before they were Spinal Tap, they were The Thamesmen and their popular song was “Gimme Some Money.” That makes a great “set closer” for this analogy.

Once the issuing banks have their respective transaction batches they can start moving money around. As you might assume, every entity involved with a transaction charges a fee for doing so. Here’s an example of where that money goes.

1. The bank takes out a fee for processing the transaction and sends the balance to the card networks.
2. The card networks take their fees out of those funds and send the balance, sans fees, to the acquiring bank.
3. The acquiring bank takes out their fees, and sends the balance to the merchant.

Knowing what entities charge fees and at what rates enables companies to shop around to find the best service and rates based on their payment volume.

The Encore

Companies that leverage payment gateways for card-not-present transactions need to ensure that their front-end technology will play nicely with the payment gateway. Fortunately, for any company that accepts payments by phone, Plum Voice’s communications platform is payment gateway agnostic. You can bring your own gateway, or change it at will without having to change your front-end user experience.