Payments 101: How Credit Card Payment Processing Works

by Daniel Nadeau 0

Stack of credit cards

Although the benefits of credit cards are straightforward, the ecosystem of electronic payment processing is often not as easily understood. This can be especially daunting for a new or mature business or nonprofit organization in the early stages of credit card acceptance. Here is some basic information about the players and how the electronic payment ecosystem works. The more knowledge you have, the more you will feel empowered to ask the right questions of your potential payment processing partners. Here are four primary steps of the credit card processing journey to help you “get smart.”

Step 1: The Payment

When a customer uses a credit card to pay for your goods or services, or make a donation, the transaction must be authorized by the bank that issued the credit card. This ensures that credit is available to the cardholder and that the purchase amount is within the cardholder’s credit limit.

Step 2: Batching

At the end of each day, merchants batch and send captured credit card transactions through the Processor to their Merchant Provider for deposit. The Payment Gateway automates this process behind the scenes.

Step 3: Clearing

The Merchant Provider accepts the deposit(s) from the Processor and forwards them to the card networks. The card networks then distribute the transactions to the corresponding Issuer. The Issuer debits the amount of the transaction from the cardholder’s account.

Step 4: Funding / Settlement

The issuing banks send the card payments back through the network to the Merchant Provider, who then transfers the payments to the appropriate merchant’s account. The funds are typically available within 24 to 48 hours.

OK, so now you have the basic process down. Next you need to understand who the players are, as well as a few other key pieces of information. You know that you’re the merchant, but what is a payment gateway, a merchant provider?

Stayed tuned for part two from my co-owner Davd Fabrizio, who will break down the difference between a gateway and a merchant account.

About the Author

While Principal and Co-owner Daniel R. Nadeau manages all facets of Payway, he is most proud of his continual ability to stay ahead of the payment processing industry by producing the best-possible software enhancements and fixes — all sensitive to customer issues.

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