How the Credit Card Transaction Process Works for Merchants
For consumers, making a credit card purchase seems like a pretty simple exercise. Behind the scenes, though, the credit card transaction process is far more complex than it looks at first glance.
Money doesn’t simply appear in the merchant’s account when a consumer swipes, inserts, or taps a payment card to make a purchase. Each transaction steps through multiple phases before the merchant sees the funds. Even then, merchants must remain aware that they could still forfeit that revenue through a return or chargeback; in some cases, it could be up to six months or more past the date of the original transaction.
Four Credit Card Transaction Steps
The procedure can be convoluted in certain cases. That said, the typical credit card transaction process—from beginning to end—essentially breaks down into four key stages: authorizing, batching, clearing, and funding.
Stage 1: Authorization
The first stage of the credit card transaction lifecycle is authorization, and it normally lasts just a few seconds. When the cardholder initiates the purchase, the merchant requests electronic authorization from the issuing bank. Here, the merchants is asking the bank if the card number is valid, and whether funds/credit associated with the card are available for the transaction.
Even this simple task is more involved than it seems. The authorization request must travel from the merchant to the processor (via a payment gateway), then on to the card network, who forwards the request on to the issuer. Once the issuer grants authorization, the response travels back through the card scheme and the acquirer before the merchant has clearance to accept the transaction. All this happens in near-real time.
It’s important to note that the authorization phase doesn’t actually finalize the transaction. This stage merely confirms the card is active and has not been reported stolen, and that there are resources to cover the purchase. Having a transaction authorized by the bank doesn’t inherently mean the purchase is authorized by the cardholder. “Authorized” transactions can still be cases of fraud.
Stage 2: Batching
Once the issuer has granted authorization, the merchant can complete the purchase. A request for authorization is still not a request for the payment, though. The merchant now must send the bank a formal request for funds to cover the transaction.
This is usually not done immediately. Instead, most eCommerce merchants store their authorized transactions in a batch to be transmitted later (typically the end of the business day).
Once the batch is complete, the merchant sends off all the authorized transactions to the processor for sorting. The processor then forwards them to the acquiring bank.
Stage 3: Clearing
The clearing process is the midway point in the credit card transaction lifecycle. After the acquirer (the merchant’s bank) receives the transactions from the processor, things get even more complex.
The acquirer distributes the transactions to the appropriate card schemes (Visa, MasterCard, UnionPay, etc.), who in turn distribute the transactions they receive to the appropriate issuer banks. The issuers charge the cardholders’ accounts for the amount of each transaction before routing the payments back through the card schemes. Finally, the schemes transfer all requested funds to the acquiring bank.
Stage 4: Funding
Even after all this, the merchant still has not been reimbursed for the card payment. Up to this point, the merchant has completed the purchase, and may have already provided the goods and services requested to the customer; however, the money is still in transit.
Funding is the last phase of the credit card transaction process. This is where the acquirer deposits the funds into the merchant’s account, finally making the money available for the merchant’s use.
As you can see, there are many credit card transaction steps and touchs tones, and it would be naïve to think it all happens for free. Every party in the chain charges a small fee for each transaction. Those fees charged by the acquirer, the issuer, and the card network are subtracted from the final amount the merchant receives.
eCommerce, Fraud & Chargebacks in the Age of COVID-19
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Withholding Revenue ... or Taking It Back
Exactly how long it takes for the money from a card transaction to show up in the merchant’s account is dependent on several factors, including:
- What day/time the transaction was made
- The cardholder’s location
- Issuing and acquiring bank policies
- Merchant risk assessment
- Industry and product or service offerings
Once merchants have determined an average timeline for credit card sales, there shouldn’t be much deviation. However, even after the funds are deposited, merchants must proceed with caution: the money could be lost if the customer returns the goods…or worse, files a chargeback.
In both scenarios, the purchase price (and shipping costs, if applicable) will be taken out of the merchant account and returned to the customer. Unlike a return, however, receiving a chargeback means the customer is under no obligation to return the purchased item. In addition, the merchant will also lose any administrative fines/fees the bank chooses to impose.
Understanding the credit card transaction process helps ensure availability of funds when needed. This knowledge helps detect risk before it becomes an unmanageable liability. That said, ensuring adequate cash flow is just one of the many challenges a merchant will deal with. If you’d like more information about managing risk and ensuring sustainable cash flow, contact Chargebacks911® today.