As a consumer, using a credit card to make purchases is simple and convenient. But it is not known how credit card payments work for merchants. Understanding this process is crucial for business owners who accept credit card payments. Many factors contribute to the merchant’s experience with online credit card payments, from authorisation and processing fees to chargebacks and fraud protection.
Here, we will explore how credit card payments work for merchants, and how you can optimise your business’s payment processing system.
Step by step: How credit card payments work for merchants
When a customer pays with a credit card, the transaction is processed through a payment gateway. This secure system allows the merchant to accept credit card payments from customers. However, merchants must clearly understand the process when accepting credit card payments. This is because credit card payments involve multiple parties, including the cardholder, the issuing bank, the acquiring bank, and the payment processor. Here’s a breakdown of how credit card payments work for merchants.
- Cardholder makes a purchase: The credit card payment process begins when the cardholder purchases from a merchant using their credit card. The cardholder provides their credit card information to the merchant, which is then transmitted to the payment processor for authorisation.
- Authorisation request: The payment processor sends an authorisation request to the issuing bank to verify that the cardholder has sufficient funds for the purchase. The issuing bank reviews the request, and either approves or declines the transaction. The issuing bank sends an authorization code to the payment processor if approved.
- Payment settlement: Once the transaction is authorised, the payment processor sends the information to the acquiring bank for payment settlement. The acquiring bank processes the payment and deposits the funds into the merchant’s account minus processing fees.
- Payment processing fees: Credit card payments come with several fees the merchant must pay. These include interchange fees, which are set by the credit card network and are usually a percentage of the transaction value. There are also payment gateway fees, which the provider charges for payment processing. Additionally, there may be other fees, such as chargeback fees and credit card late payment charges.
But the payment processing fees are charges assessed by the payment processor for their services. These fees typically range from 1.5% to 3.5% of the transaction amount, depending on the type of card used and the industry of the merchant.
- Payment reconciliation: The acquiring bank and the payment processor reconcile payments at the end of each day to ensure that all transactions have been processed and settled correctly. Any discrepancies are resolved, and the merchant is credited or debited accordingly.
- Chargebacks: In some cases, cardholders may dispute a transaction, resulting in a chargeback. A chargeback occurs when a cardholder disputes a transaction with their issuing bank and requests a refund. The issuing bank reverses the transaction and debits the funds from the merchant’s account.
Things to look for
- Merchants can choose to accept credit card payments in a few different ways. For example, they can use a point-of-sale (POS) system to swipe or tap a customer’s card. They can also use an online payment gateway, which allows customers to enter their card details on a website or mobile app.
- Merchants need to choose the right payment processing solution for their business, as this can affect their bottom line. For example, some payment gateway providers charge higher fees than others, and some may need to be compatible with certain types of businesses. It’s also important to choose a provider that offers good customer support, as any payment issues can cause significant disruptions to a business’s operations.
Conclusion
Credit card payments involve several parties, including the cardholder, the issuing bank, the acquiring bank, and the payment processor. Therefore, merchants must understand how credit card payments work to ensure smooth and secure transactions, manage their finances effectively, and minimise chargebacks. Furthermore, by working with a reputable payment processor, merchants can streamline their credit card payment process and provide a positive experience for their customers.
