Merchant Credit Card Processing: How It Works

4th December 2009

Accepting credit cards is a secretive process. The amount of work that

actually goes into the process is actually quite surprising to the

common consumer. Merchant credit card processing is amazing and the

technology seems to get more elaborate every year.

It all starts when a customer goes to pay for your product(s) or

service(s) with their credit card. The information from the card is

then recorded, which can be done through several methods, and then

verified so that the merchant (your business) can receive the actual

payment for the transaction.

With this card processing the information can be recorded in four very

different ways. The first way is by manual entry, meaning that the

actual information is entered manually or by hand by the merchant. This

way is uncommon in storefronts and is mostly used now to take orders

via the telephone or through mail.

The second way is use a card imprinter. This used to be the best

technology that the credit card industry had to offer. The customer

would actually hand over their credit card directly to a merchant who

would set the card into the machine and run an imprint (copy) of the

card itself. However, this process has become outdated and it is not

uncommon for the newer generation of consumers to have not ever seen

one of these types of machines.

A point-of-sale (POS) terminal, also called PDQ machines, has become the most common. Often this

machine is a small keypad and screen in which the consumer can slide

their card without having to give the card to the actual merchant. The

terminal will then read the card and either print a receipt for the

consumer’s signature or the terminal may ask for verification PIN code

in which the card is directly debited. Due to the fact the payment card

never leaves the consumer’s hand this way is often thought to be the

most secure method of merchant credit card processing.

The basic steps for processing a transaction look like this:

• Cardholder Makes Purchase

• Authorization is Requested (request for approval)

• Verification is Received

• Purchase is Approved

• Approved Transactions are Stored in a Batch

• Clearing and Settlement (the batch is submitted for funding)

• The Card Issuer Pays (cardholder is billed)

• Funds are Transferred

• Merchant Receives Payment

Usually the entire credit card processing takes about 3 days. Sometimes

there are chargebacks. This simply means there was an error in

processing the transaction or the cardholder disputed the transaction.

In the event that a chargeback occurs the issuer will return the

transaction to the acquirer for resolution. The merchant then receives

the chargeback via the acquirer; at this point the merchant can accept

it or contest it.

Whether you are a small business looking to expand or a large business

looking to expand your options merchant credit card processing is a

great way to do either. Your customers will appreciate the added

options for payment and business will definitely grow.