What is Credit Card Transaction Processing and how does it work?

What is Credit Card Transaction Processing and how does it work?
By alphacardprocess January 14, 2022

Credit card Transaction processing is the process of sending Credit Card transaction details from a merchant to a Credit Card Processor. The Credit Card transaction process consists of different steps or stages, this article will focus on these stages and will also use simple analogy to help you understand Credit Card transactions better.

Credit Card Transaction processing consist of four basic stages as defined by Credit Card Processing Industry:

  • Authorization – Credit card transaction is approved or declined. This stage occur immediately after a Credit Card purchase has been made. The Credit Card processing terminal will try to contact Credit card network through a Credit Card Processor for authorisation of Credit Card transaction status.
  • Capture – Payment is captured at the end of the day and funds are deposited into the merchant’s account. Credit Card processing terminal will send Credit Card transaction details together with Credit card information and its authorization to Credit Card network for funds deposit.
  • Settlement – Once Credit card transactions has been authorized, Credit Card transactions and Credit card settlement happen almost at the same time. Funds that were captured by merchants such as Credit card processing terminal are deposited into merchant’s bank account and Credit Card networks pays the merchant’s Credit Card Processor.
  • Chargeback – This is the reversal of a Credit Card Transaction that has previously been authorized, captured and settled. A chargeback can happen when a Credit Cardholder disputes a purchase with their Credit Card Issuer. The Credit Card issuer will chargeback Credit card transactions to Credit Card Processor who in turn will contact the Credit card terminal provider.
  • This Credit Card Analysis provides Credit Card Transaction flow that typically occurs between Credit Cardholders, merchants and Credit Card Processors or Banks. Remember this is just a simplistic explanation of the transaction flow should not be used as Financial Advice.

Analogy of Credit Card Transaction Processing

Credit Card Transactions can be best explained by using an analogy. Buying a House can be used as an analogy for Credit card purchase.

When you purchase a House, you need to go through different steps in order to complete the purchase. The first step is finding the right House, once you have found the right House you need to apply for a Credit card in order to be approved and allowed to purchase that House. Credit Card transaction processing then begins at the time of purchase:

  1. Credit card Authorization – your Credit is checked by Credit Card Issuer when making the initial Credit Card purchase
  2. Credit Card Capture – Funds are transferred from Credit Card Issuer to the House Seller at the end of the day
  3. Credit Card Settlement – Credit Card Issuer pays the House Seller almost immediately after Credit Card purchase is made
  4. Credit Card Chargeback – If somebody disputes the purchase, Credit Card Issuer charges back Credit card transactions to Credit Card Processor.

The important thing to remember is that in order for a Credit Card purchase to go through, Credit Card Issuer must be contacted and authorize the Credit Card purchase. Credit Card Processing terminal will try to contact Credit card network through a Credit Card Processor for authorisation of Credit Card transaction status. This flow typically happens immediately after Credit Card purchase is made.

Credit Card Transaction Processing

Now that you understand how Credit Card Transactions work, it is important to know what Credit Card Processor your business should be using.

There are a few Credit Card Processors to choose from, but we recommend using Credit card transaction processing company like Square or PayPal. They both have Credit Card Processing terminals that can be used to easily accept Credit Card payments. Credit Card Terminals have Credit Card readers that can be plugged into phones, iPads or computers. Credit Card transactions are then processed by Credit card transaction processing company’s Credit Card Processor network. Credit Cards are swiped or manually entered to process Credit card transactions.

Credit cards can also be keyed in to your Credit Card terminal, this is done by manually typing in Credit Card number, expiration date and security code.

If you have any other questions about Credit Card Transaction Processing or Credit Card Terminals, please feel free to contact us at any time.