Small Business Credit Card Transactions – What Happens When a Customer Buys a Product Using a Credit Card

When small businesses are researching credit card processing for their companies having a complete understanding of a credit card transaction can be very helpful.

The Involved Parties

The merchant works with a merchant bank to be able to accept credit card payments. The merchant bank setups a merchant account for the seller.

The card issuing bank is the bank that the customer uses to be able to buy products or services via a credit card.

The Credit Card Transaction Process

These are the steps that occur when a good or service is purchased using a credit card.

Credit Card Information Input

Credit card information can be input in two ways. It can be swiped or keyed in. When someone is physically present during the purchase (at a movie theater, or supermarket) their credit card is usually swiped using a magnetic card reading point of service (POS) machine.

If the transaction is done over the internet or by mail order or over the telephone then the information cannot be swiped and must be keyed in. Since a keyed in transaction has a greater potential for fraud additional information is generally required to process the transaction like the 3 or 4 digit card security number, the card holders billing address and phone number. In the event of an internet transaction the keyed in information travels through a payment gateway which works similarly to a POS.

Authorization

Once the card information is input it goes to the merchant account provider. The merchant account provider communicates with the costumer’s credit card issuing bank where it determines whether the card holder has enough credit for the purchase. The customer?s issuing bank then issues a hold on the card against that amount and sends an authorization code to merchant bank and to the merchant.

Money Transfer using Batch Processing

During the course of the day the various merchant transactions are stored by the merchant account provider. By the close of the day these transactions are batch processed, which results in money being transferred from the card issuing bank to the merchant account bank. Before this done the card issuing bank subtracts a fee and then merchant account bank also takes a fee.

Here is example with hard numbers. If a $100 service is purchased and the merchant account fee is $0.50 and the card issuer’s fee is two percent then first $2.00 is subtracted and given to the card issuer and then $0.50 is subtracted and paid to the merchant account provider, leaving $97.50 for the merchant.

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categories: credit card processing,merchant accounts,small business,finance