How Credit Card Transaction Works?

There are billion credit cards transactions are processed annually. But have you ever wondered what exactly happens after your card is swiped? There are 4 steps to credit card transactions processing

1）Authorization
2）Batching
3）Clearing
4）Funding

Here are how your credit card transactions processed. 

 

 

Authorization

1) The cardholder requests a purchase from the merchant.

2) The merchant will submit the request to acquirer (merchant bank)

3)The acquirer sends a request to issuer to authorize the transaction

4)An authorization code will be sent out by card issuer to the acquirer if there is a valid available balance

5)Acquirer authorizes the transaction

6)Cardholder receives the purchased item

Batching

1)At the end of the day, the merchant will review all the day's sales to ensure they were authorized and signed by cardholder.

2)The merchant will transmit all the sales at once, called a batch to acquirer to receive payment

Clearing

1)The batch is sent through the card network (Visa / Master) to request payment from card issuer.

2)Card network distributes each transaction to appropriate card issuer

3)The card issuer subtract its interchange fees, which are share with card network, and then transfer the amount.

4)The card network routes the amount to acquirer 

 

 

Funding

1)The acquirer subtract its discount fee and pays the merchant

2) The merchant receives the payment, which minus the interchange and discount fee

3) The cardholder is billed for the transaction

Glossary:-

 1)Interchange fee = A fee paid by merchant to credit card issuer and credit card network as a fee to accepting credit card. They generally range from 1% - 3%.

2)Discount fee = A processing fee paid by merchant to card acquirer to cover the cost of processing credit card