How Does Credit Card Processing Work?

Credit card in a ATM

Despite all the publicity about credit cards and all the pitfalls they can create, credit cards continue to be an important part of our world. There are very few things we can do that don’t require a credit card and, whether you’re a business owner or a private consumer, it’s helpful to know how credit card processing works and where your money goes.

Who is involved in the transaction?

There are two steps to credit card transactions (authorization and settlement), but several people are involved in credit card processing.

  • Buyer: The person who owns the credit card and is making the purchase.
  • Merchant: The store in which the buyer is making their purchase.
  • Credit card processing merchant: The middle man who gets the initial transaction and sends it to the credit card issuing company.
  • Merchant’s bank: This is the bank the merchant chooses to do business with.
  • Credit card issuing company: This is the bank or credit card company that issued the credit card to the buyer.

How does credit card processing work?

To give you a better idea of how credit card processing works and who exactly does what, we’ll go over a simple transaction scenario. Let’s pretend you’re out to dinner at a restaurant and use a credit card you were issued by the local credit union. You are the buyer and the restaurant is the merchant.

When you give your credit card to the cashier at the restaurant, the cashier runs it through a credit card machine. The credit card machine sends the transaction to the credit card processing merchant. This is the company the restaurant has hired to do their credit card processing. The credit card processing merchant sends the transaction to your local credit card company.

Once your credit union verifies that everything is valid, the transaction is sent back to the restaurant’s credit card processing merchant, who in turn sends it to the restaurant’s bank. Once the bank approves the transaction, it’s sent back to the original merchant (the restaurant).

What makes a good credit card processing company?

Credit card processing also includes many different charges, such as activation fees, monthly fees, transaction fees, and annual fees. If you’re a business owner, the whole purpose of hiring a credit card processing company is to make more money. To make money, you need a good credit card processing company that doesn’t overwhelm you with service fees.

Finding the Best Credit Card Processing Company

As a business owner, you will find many promising offers from credit card processing companies, which can make it very difficult to make a choice. Do your research on the company and learn about their fees. Find out how much they’re going to cost you in the long run, don’t simply look at the great introductory offer.

Photo: Depositphotos/©uatp12

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