All You Need to Know About Credit Card Transaction Process
If you’re an online shopper on a credit card with a rewards program, paying for your purchase in full every time may not seem like the best choice. And it’s not!
When you purchase a product using your credit card, the merchant charges the price of the good or service to your account. This is called “issuing a credit.”
The issuing process also takes place when you are given a cash advance from an ATM or if you use your credit card to withdraw money from an automated teller machine. Some terms, such as APR and finance charges, go along with this process.
What is a credit card?
A credit card is issued to consumers for use as credit in the payment of debts. They control the consumer’s purchasing power by reducing debt owed through interest charges or direct payments with each purchase. In return for this service, issuers accept a great deal of risk, including the risk that they will be unable to collect payment from a defaulting account. The issuer offers the consumer both convenience and an extended period before repayment through purchases and interest charges, leading them to incur high financial costs. Credit cards are issued by banks or corporations such as Visa and Mastercard. These businesses are a source of revenue for banks.
Why are credit cards important?
There are many credit cards available in the market these days. Though these cards can be used for shopping, many people do not know why it is important to use them. Generally, there are two types of credit cards: a store card and a charge card. The latter can offer rewards such as cashback or travel miles in exchange for your purchases. A charge card offers some other benefits, which is why it should be used by anyone looking to boost their savings.
Credit cards have been around since the late 1960s and have made saving easier than ever before. Low-interest rates and reward programs provide convenience while maximizing your monetary gain. While store cards are convenient, they often have restrictions on where the card can be used. When someone uses a credit card, they have more flexibility in choosing their options. Also, store cards often limit the amount of money that can be spent or other limitations to when you are permitted to use the card. There is no such restriction with charge cards, and it is easy to make your purchases without going over your budget.
A credit card is a great way to stay on track with saving money. The best thing about using a charge card is that it allows you to pay off all of your purchases at the end of each month. This helps you avoid accumulating more debt and keeps you from missing monthly payments for your credit cards.
Who are the people involved in credit and debit card transactions?
- A cardholder obtains a debit or credit card with an issuing bank and then uses the account to purchase goods or services.
- Any type of company that accepts card payments in exchange for products or services is referred to as a merchant.
- A merchant bank opens and manages merchant accounts. Merchant banks enable merchants to accept credit and debit card payments as deposits.
- Payment processors are businesses that handle credit and debit card transactions. Payment processors facilitate card payments by connecting merchants, merchant banks, card networks, and others.
- Banks, credit unions, and other institutions that provide debit and credit cards via card associations are known as issuing banks.
- Visa, Mastercard, Discover, and American Express are all card associations. The card associations, among other things, set interchange rates and qualification guidelines and serve as an arbiter between issuing and acquiring banks.
What is the general process of making a credit card transaction?
- The consumer chooses to buy something from a store by selecting “buy now” or “add to cart.” This triggers the website to present the consumer with their account information and ask them to verify their identity if they haven’t already. The consumer enters his/her payment details and selects “continue.” They are shown an overview of their purchase, asked to confirm that all information is correct, and given one final opportunity to back out.
- The website forwards the payment information to the bank, verifying and processing it. The financial institution informs the store that they’re okay to accept the funds, and both parties are informed of this. Both parties take this opportunity to record and tally up their income, gains, and losses before officially processing the transaction.
- To make the payment, the cardholder presents their card (via swipe, tap, insert, or another secure method, such as contactless. The request could come from a physical store’s credit card terminal or Retail POS system, an eCommerce website gateway, or mobile or in-app payment acceptance.
- The merchant sends a payment authorization request to their payment processor. The payment processor forwards transactions to the appropriate card association, which then forwards them to the issuing bank.
- Authorization requests are sent to the issuing bank, with parameters such as CVV, AVS validation, and expiration date included.
- The transaction is authorized or rejected by the issuing bank. Transactions may be declined due to insufficient funds or available credit, when a cardholder’s account is closed or expired when a payment is due, or other factors.
- The issuing bank then forwards the approval (or denial) status to the card association, merchant bank, and the merchant.
- Merchants send authorized transactions in batches to their payment processors. The payment processor forwards transaction information to card associations, which convey the appropriate debits to the issuing banks in their network.
- The transaction amount is charged to the cardholder’s account by the issuing bank. The issuing bank then transfers the necessary funds to the merchant bank with fewer interchange fees.
- The funds are then deposited into the merchant account by the merchant bank.
Credit cards offer cardholder convenience. This is a big part of the appeal of credit cards. But while the customer-side transaction is quick and easy, the back-end communication between the merchant and other parties is complex and complicated. A wealth of information is shared between merchants, acquiring banks, card networks, and issuing banks to authorize card details and make secure purchases. Cardholders don’t need to know how all of this works, but it is helpful to understand why merchants can set purchasing policies for their customers in-store or online.