Learn how credit card transaction processing works, from authorization to settlement, in this quick and easy guide to payment processing.
As customer payment preference evolves financial institutes must adapt to these changing payment processing systems to stay competitive. The need of the hour is to build robust credit card processing systems that will improve customer experiences, streamline operations, and provide access to new growth opportunities. However, improperly setting up credit card payment techniques can result in additional costs, operational inefficiencies, and increased vulnerability to payment fraud.
In today’s blog, we will run through some of the best approaches to how credit card transaction processing works and how to set up a credit card processing system.
Table of Contents
1. How Does Credit Card Transaction Processing Work?
1.1. Initiation
1.2. Data Transmission
1.3. Authorisation Request
1.4. Approval Or Decline
1.5. Authorization Response
1.6. Payment Settlement
1.7. Funds Transfer
2. Why Does Credit Card Transaction Processing Matter?
1. How Does Credit Card Transaction Processing Work?
Generally, credit card transaction processing varies depending on where a transaction takes place and what type of card is used. An online credit card transaction can be initiated in two ways:
- an in-person card transaction where the customer uses a physical card
- a credit card is stored in a digital wallet
But, whatever the transaction process remains the method remains the same:
1.1. Initiation
A cardholder provides their credit card information to the business; from here customers have two options- in-person transactions, which means swiping, inserting, or tapping their card. On the other hand, for online transactions, this means entering the card details manually or selecting a card from their stored payment methods.
1.2. Data Transmission
The financial businesses’s POS system or payment gateway captures the customer’s transaction details and securely transmits this information to the credit card processor.
1.3. Authorisation Request
The credit card processor forwards the customer’s data transactions to the right card network which moves forward with routes that authorization request to the issuing bank.
1.4. Approval Or Decline
Banks verify the cardholder’s account, scanning for sufficient funds and any potential fraud or security issues. These evaluations will help the bank in getting approve or decline the transaction and convey this decision to the card network, which forwards the information to the credit card processor.
1.5. Authorization Response
The credit card processor sends the authorization response – either an approval or a decline code – to the business’s POS system or payment gateway. If the transaction is approved, the business can complete the sale and provide the goods or services to the customer.
1.6. Payment Settlement
The financial institutes submit the transaction batches to get approved and the credit card processor for settlement. The processor forwards the transaction components to the respective card networks.
1.7. Funds Transfer
Now the card networks further coordinate with the issuing banks and transfer the funds for each transaction to the acquiring bank, which accepts the funds in the merchant account. The bank then transfers the funds into the business’s regular enterprise bank account, minus any processing fees. This entire process usually takes 1–3 business days.
2. Why Does Credit Card Transaction Processing Matter?
In the 21st century credit card transaction processing instantly impacts a business’s ability to deliver convenient and secure payment choices for customers, which directly affects sales, customer satisfaction, and overall growth. Therefore financial institutes must focus on delivering a simple, convenient credit card payment experience, so businesses can meet the growing needs of customers, eventually leading to increased customer satisfaction and loyalty.
Credit card payments also boost sales for financial institutes by lowering the challenges that customers face while making purchases. As we move cashless customers spend more when using credit cards enabling businesses to accept different currencies and expand their marketing. Lastly, a strong credit card processing system aids in protecting both the business and its customers from fraud and data breaches. Institutes that use strong credit card processing systems need to adhere to security standards such as PCI DSS. Following this compliance will help you to safeguard sensitive customer information and maintain trust.
In the end, setting up a credit card processing system will enable financial businesses to create a more robust and adaptable foundation for growth and stability. Therefore understanding customers’ personal preferences, buying habits, and payment attitudes will help you deliver the best possible needs.
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