This article discusses How Credit Card Transactions Work. Do you want to know all the things that happen to enable you to make purchases with your card without going to the bank? Do you want to know the people involved in each credit card transaction? The people include you, the merchants, their banks, credit card payment network and the credit card issuer. The first question is answered below.
How Credit Card Transactions Work; Swipe Your Credit Card for Approval
This is like putting your debit card into the ATM. Swipe your credit card through the payment terminal. The payment terminal communicates with the merchant bank to ask whether you can make the credit card purchase.
How Credit Card Transactions Work; Credit Card Authorization
The merchant bank contacts the right credit card network (Visa, MasterCard, American Express, or Discover) to get an approval for the credit card. Then, the payment network contacts the credit card issuer to make sure the credit card is valid and there’s enough available credit for the transaction. The American Express and Discover are the payment network and the credit card issuer, so they approve credit card transactions themselves. Visa and MasterCard do not issue credit cards and must contact the credit card issuer.
In this stage, the credit card issuer sends back an authorization code for the transaction. If your credit card is declined, you won’t get a reason at the point of sale. You can ask your credit card issuer why.
The store’s bank sends its communications electronically through the phone line or through the internet. If in a store or restaurant you hear the credit card terminal communicating with the merchant bank. It means that they are exchanging information.
Credit Card Approval
It is the merchant bank sends the approval message for your credit card purchase, the receipt prints, you sign, and take your purchased goods. But the merchant has not been paid and your credit card hasn’t been charged. If you check your credit card online right after you’ve made a purchase, the payment hasn’t shown up in your transaction list just yet. Some credit card issuers have more stringent reporting systems that will show authorized transactions and may even reduce your available credit by the amount of your recent purchase. Most times, you won’t see the charge for a few days.
After all daily transactions, the merchant prints a list of all the credit card transactions. He sends them to their bank. The merchant’s bank is responsible for sending the transactions to the appropriate payment network for processing.
Credit Card Issuer Sends Payment
The credit card network informs each credit card issuer about when payments are due. The credit card issuer keeps a fee called the interchange fee, as part of its agreement with the merchant. Share the fee with credit card networks. Since American Express and Discover are both the credit card network and the credit card issuer, they get to keep a higher percentage of the fee.
The Merchant Gets his Payment
Then, the credit card network sends payment to the merchant bank who collects its own fee before depositing the credit card charges in the merchant’s account.
The Credit Card Issuer Bills You
On a monthly basis, the credit card issuer sends a bill for the charges you made during the month. As a cardholder, you pay some or all the charges. If by chance or due to lack of fund, you pay only a portion of the charges, you’ll pay interest on the amount that you don’t pay. The credit card issuer or financial institution uses the money and interest you pay to pay merchants as new transactions are made. This is exactly hoe credit card transactions work.