It might seem like a simple transaction of money when your card is swiped, tapped, or dipped into a terminal. However, there is much more that happens on the back end that you might not know of. The actual processing of payments happens within a matter of seconds. Within this short amount of time, the transaction passes through the merchant, payment processor, payment gateway, bank or credit card company, and a merchant account. During the process, the card is verified to ensure it is valid and approved to transfer the amount of money. After this process is complete, your card/payment is either accepted or declined using anti-fraud measures.
You can think of a payment processor as a shuttle that transports information from the issuing bank to merchant accounts. In this part of the process, the processor essentially validates the card’s security and moves the monetary payment to the merchant’s account.
During an online transaction, the payment gateway is the channel that connects the payment processor to the credit card company (VISA, American Express, Mastercard, or Discover). This step is very important in transferring your customer’s money to your merchant account.
The acquiring bank is the financial institution that accepts debit/credit card transactions from the cardholder. Connected to the issuing bank, the acquiring bank determines if the card should be accepted or declined based on the information the issuing bank and card network provides.
The issuing bank is the financial institution of the cardholder. It is responsible for the card holder’s ability to complete the transaction with their line of credit. Upon the card authorization, the issuing bank will either approve or decline the transaction.
A merchant is the processing account of the business location. At a retail location, the cardholder’s card is swiped, dipped, or tapped their credit/debit card at. At an online store, their card is keyed into the payment gateway. The merchant account is specific for that merchant.
How does it work?
First, the customer/cardholder swipes or dips their card on the merchant’s terminal or enters in the card information into the payment gateway to initiate the transaction. Second, the merchant’s payment terminal, gateway or point of sale software system sends the credit card details to the acquiring bank. The acquiring bank then sends the information to the card network, who sends to the issuing bank to confirm the funds are available. Once the credit card payment authorization request is completed from the issuing bank, the issuing bank then verifies the card information to send back to the card network. The card network will then send an approval code to the merchant’s terminal, gateway or point of sale software and the transaction is complete.
Next time you make a payment, remember all the steps that occur in the process of completing your transaction.