How does credit card transactions work? Steps and What Could Go Wrong?
Making a purchase with a credit card seems like a pretty simple exercise. You swipe your card, and the transaction is complete. Right?
Well, if we look behind the scenes, we see that the credit card transaction process is much more complicated than it seems at first glance. ‘
Money doesn’t just appear in a merchant’s account when a consumer swipes, inserts, or taps a payment card to make a purchase. Each transaction goes through several stages involving various parties before the seller receives the funds.
Even then, sellers should still be aware that they could still lose that revenue through returns or chargebacks. In some cases, this can happen up to six months or more before the original transaction date.
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Participants in credit card transactions
Before diving into the details of the credit card transaction process, it’s a good idea to know all the players and how they get involved. Below, we present some of the important parties involved in every credit card transaction:
Individuals initiate transactions by swiping a credit card in their name. The buyer receives the goods from the seller and is paid by the issuing bank. The cardholder has the understanding with the bank that they will reimburse the issuing bank for the transaction after they pay their monthly credit card bill.
The owner of the store or eCommerce store that the cardholder has initiated a purchase from. Merchants often accept credit cards to facilitate payment for transactions. They may also accept other payment methods including cash, debit, and contactless technologies.
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merchant, send transaction details and pre-authorize the card network for approval. The buyer then plays the role of relaying the issuing bank’s response to the seller. Sometimes these actions will be performed internally or may be performed with a third-party payment processor or merchant service provider.
For many sellers, the buyer also acts as their payment processor. However, in other cases, these may be two separate entities. This processor serves to facilitate communication between the buying bank and the seller. These third party payment facilitators will be responsible for sending and receiving transaction details and authorization, which it will then provide to the respective merchant or bank.
Credit card associations operate branded credit card networks to facilitate global transactions for a given credit card. They also set rules and guidelines that all banks and merchants must follow in order to use said platforms and govern exchange fees (more on this below). The most widely used card networks in the United States are Visa, Mastercard, American Express, and Discover. The card network will accept authorization requests from the merchant’s buying bank, and then forward that information to the cardholder’s issuing bank for approval.
Cardholder’s bank or payment account support person issues the card. The issuing bank will receive a payment authorization request through the purchasing bank, the card network, or through a third-party processor, and then relay an approval or rejection response via the same channels to the purchasing bank. .
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