What is Credit Card Processing and How does it work?

Credit card processing is a merchant service offered by banks and financial institutions to allow businesses, retailers and merchants to accept credit cards as payment for goods or services provided to customers.

The main purpose of credit card processing is for verifying the authenticity of a customer putting through charge on their credit, debit or stored value cards i.e Visa, MasterCard or American Express. Mastercard and Visa are two of the most popular credit card processing companies worldwide and hence we will be discussing more about their services (Visa and MasterCard)in this article.

Credit card processing works on a pretty simple basis, for instance: Let us imagine that you run a business of your own and you have a shop inside a shopping mall. Your shop has to be open all day for customers so as to provide them with the facility of purchasing stuff from your store by credit or debit cards. So now it's time to swipe those credit cards :)

As you bring out the machine (POS) along with the slips to swipe the cards, you will need a person who has knowledge of processing credit card transactions so that your business can run smoothly. That is where merchant account providers come into picture. A merchant account provider helps you in dealing with all legal documentation and agreements related to credit card processing services.

The process of swiping the credit card is also known as card present transaction, the machine connected to your shop's counter or POS is known as a point of sale device and a person who swipes the cards on the machine is called a merchant.

A series of steps occur when you swipe a credit card at your store:

Step 1: The first step is where customer hands over the card to the merchant and now it's time for merchant to swipe those cards using a point of sale device.

Step 2: The next step is where the machine processes data related to the credit card and presents this information on the screen present in front of the customer. This includes filling out credit card number, security code (CVV), delivery address, name on the card and so on. This step is beneficial for both parties as it provides security to the customer that his card number will be encrypted i.e hidden from all other person's that are present in the store or nearby area.

Step 3: The next step which comes after the customer reviewing the credit card information has been processed is where merchant enters the amount of purchase to be put through charge on customer's card.

Step 4: The next step is said to be the final step which is also known as payment authorization. This is where the credit card processing company places a hold on funds available in your account till the charge has been verified by you or merchant. These funds are unlocked after the charge has been verified by you or merchant in case of dispute.

The whole process looks like this:

Now that we have seen how credit card processing works, let us checkout some FAQs related to it before concluding with our article on credit card processing. Final thing to be noted here is that credit card processing charges are not present in the above steps but are separate charges which you need to pay at the end of the month to your credit card processing company.

Ques 1. How does credit card processing work?

Ans. As explained above, when a customer hands over his/her card to the merchant, the machine first processes data related to credit card. This includes filling out all essential details on the slip or reciting this information verbally for the customer to hear if he/she is visually impaired.

Ques 2. Who are merchants?

Ans. Merchants are those people who run a business of their own and want to provide purchasing facilities to their customers by use of credit cards. They are the end user in this transaction.

Ques 3. What is a payment gateway?

Ans. Payment gateways are basically web services that authorize online payments with credit or debit card numbers on behalf of merchants or account holders. The act of authorization requires permission from the customer so as to confirm that he/she is indeed willing to perform the transaction.

Ques 4. Is credit card machine required for swiping cards at physical stores?

Ans. No, credit card machine is not a compulsory requirement to swipe cards at physical shops as merchants can also use manual machines which require manual typing of all details present on the slip before it gets printed out.

Ques 5. What are credit card processing fees?

Ans. Like every business, the credit card processing company too has its own rules and regulations which it needs to follow in order to make profits for itself. These rules involve monthly charges which will be added up at the end of the month if you have done more than $5000 worth of business in a month period.

Ques 6. Are there any charges related to card swiping?

Ans. Yes, if you have done more than $5000 worth of business with the credit/debit card machine for that particular month then charges will be made towards the end of the next month cycle (1st -30th). These costs include the monthly minimum fee and other credit card processing fees which will be charged to you by the credit card processing company.

Ques 7. Are there any charges for buying/owning a credit card machine?

Ans. No, if your business does not exceed $5000 worth of charge in a month then there are no fixed charges related to having the machine. However, there are monthly fees which will be added to your monthly credit card processing charges if the store has done more than $5000 worth of business in that particular month (1st-30th).

Ques 8. How can I save money on my credit card transactions?

Ans. So as to reduce costs related to credit card processing, one can choose to use a less expensive mode of payment or offer free shipping service.

Ques 9. What are the different modes of payment available for processing credit cards?

Ans. There are three major modes of credit card processing - online gateway, mobile app gateway and traditional swiping machine method.

Ques 10. How do secured credit cards work?

Ans. Secured credit cards are those which are backed up by a certain amount of money deposited in the account of that particular card company by the customer or other party.