How Credit Card Processing System Works: A Beginner’s Guide

For merchants, understanding how credit card processing system works might be tricky. After all, there are just too many steps.

So, we decided to create a guide to simplify things. 

This is the story of credit card processing. And we’ll explain exactly how a payment gateway can help you accept credit card payments

Related Read: Payment Systems for Ecommerce: A to Z Guide For Businesses

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What is Credit Card Processing System?

Online credit card processing happens when a business accepts customer payments through credit cards directly in their online store.

It involves the credit payment processor and a payment gateway to share the data over the web to ensure that the merchant receives the payment.

In fact, in today’s time, a credit card processing system has become a necessity. After all, there is a significant rise in popularity of digital payments and the recurring bill model.

Credit Card Processing System: there is decline of 42% in usage of cash between 2019-2020

Stakeholders/Players in Credit Card Processing System

Firstly, let’s identify the key players in the credit card payment system. From the time the customer clicks on the “Pay” button on your website or app till the merchant receives the payment, these are the factors and stakeholders involved in the payment process.

Credit Card Processing System: stp by step guide

1. Cardholder: Customer who initiates the online transaction using their credit or debit card.

2. Merchant: A business owner selling goods or services and accepting payment for the same through a credit card payment gateway

3. Credit card networks: An association of major card brands (like Visa, RuPay or Mastercard) This association is responsible for deciding the fees, security guidelines and they help in dispute resolution.

4. Acquiring bank: The bank in which the merchant receives money upon settlement

5. Issuing bank: Issuing bank is the bank account of the customer. It is the account from which the transaction amount is deducted.

6. Payment Gateway: A credit card payment gateway like Cashfree validates customer card details. Moreover, it handles the settlement process. Acting as an interface between the seller’s website and the acquirer, it encrypts sensitive data such as credit card details.

7. Payment Processor: The Payment Processor helps communicate the payment information from the card companies to the banks. 

The benefit of using a credit card payment gateway is that it ensures that the customer’s sensitive credit card details are securely passed from the customer to the acquiring bank, through the merchant.

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Factors Affecting Credit Card Processing System

For an overall superb payment card processing, the factors that play an integral role are:

factors Affecting Credit Card Processing System

Transaction Speed

Customers prefer to pay with debit and credit cards as it is a quick mode of transacting with your business. They want the process to be fast and secure. Ideally, you should choose a credit card processing system that can handle large volumes of transactions safely and accurately. Friction-less merchant credit card processing can efficiently complete a transaction in less than two seconds.

Strong Uptime Record

Credit card payment system declines can prove detrimental to your business. As a result, customers could deem your brand as inconvenient and might move to a different online merchant. Reliable card processors will have a robust uptime history and backup measures to minimize service interruptions.

Fair and Transparent Rate Structure 

Credit card processing rates should be transparent. You must ask the credit card payment processing system provider for complete details of their rate structure. A payment processing fee may include components like interchange pricing, and a concise pricing structure will help you analyze all details.

Access to Helpful Customer Support

Troubleshooting and maintenance of your credit card payment gateway is an essential part of dealing with a complex system. Ensure your credit card processor provides 24/7 customer support.

Credit Card Processing System: Step by Step Guide

Authorization Process 

The first step in the credit card processing system is the authorization process. Verifying the identity of the customer helps in avoiding fraud and AML issues.

In a nutshell, there are 4 steps in the authorization process of a card processing system.  

Credit Card Processing System:Authorization Process 

1. Cardholders provide their card information during checkout. The merchant’s payment gateway tokenizes and encrypts the data and forwards it to Acquiring Bank.

2. Consequently, the encrypted data is sent to the payment processor. The processor then uses the card association’s network to route the data to the Issuing bank (customer’s bank).

3. The bank verifies the identity of the customer. It also checks for the availability of funds to complete the transaction.

4. After that, as per the verification report, the bank either authorizes or declines the payment. This is immediately reflected in the merchant’s payment gateway. After the authorization/rejection from the bank, the customer completes the transaction or is redirected to a fresh payment page.

Settlement and Funding Process

Settlement is the second step in the payment process. It takes place after the transaction is approved. When the bank gives authorization for a transaction, the merchant can make a sale.

However, the merchant receives the funds only after the settlement.

The 4-step process of payment settlement goes a bit like this.

Credit Card Processing System:: settlement and Funding Process

1. After the merchant receives the authorization, the payment gateway sends approval for the reconciliation of payment to the payment processor.

2. Upon successful reconciliation the payment processor deducts the applicable fees (if any) from the transaction amount. It then deposits the amount in the merchant’s acquiring bank. This process is known as settlement and it may take one or two business days. This is called the settlement period. Usually, funds are not settled in real-time. Instead, the transactions are batched for a day before proceeding with the settlement process. This helps reduce total processing costs when a merchant records multiple sales in a day.

3. The card network deducts the transaction amount from the Issuing bank. It sends this amount to the payment processor for submission in acquiring the bank account of the merchant.

4. Customer’s Issuing bank deducts the total transaction amount from the customer’s account. The bank then sends an invoice or account statement to the cardholder, known as the credit card statement. The customer needs to settle the credit card outstanding according to his or her statement within the stipulated date as per his billing cycle. If the customer fails to do so, interest charges are levied by the bank.

Credit Card Processing System::  instant settlement

Transaction Fees in Credit Card Processing System

The parties involved in a credit card payment processing system charge a fee for their services. 

Third party payment processors may use a daily or monthly discounting method to deduct credit card fees from your transaction amount. The processing fee deduction happens each day in daily discounting and every month in monthly discounting. However, the processors settle the funds daily in monthly discounting. However, the fees for the entire month are deducted at the end of the month.

Credit Card Processing System: cta

These deductions include the following types of fees: 

1. Start-up/annual fee: You can avoid the start-up or annual fee by using a payment gateway for credit card payment processing.

2. Monthly statement fee

3. Discount rate

4. Transaction fee

5. Minimum monthly fee

6. Credit card processing equipment lease charge

7. Gateway fee if you have an internet merchant account

8. Chargeback fees

9. Address verification fee

10. Termination fees

Choosing a Payment Gateway for your Business

Whilst choosing a merchant credit card processing system and payment gateway sounds challenging, they don’t necessarily have to be. Naturally, as the safety of your customers’ credit card information and your reputation are at stake, credit card payment gateways are integral for your business.

However, payment gateways such as Cashfree make it easier. They work with banks, credit card networks and regulatory bodies, enabling brands to provide flexible payments to their customers.

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