How Does Credit Card Processing Really Work?

by Ryan Gellis

Ryan is the founding partner of Robofirm and is responsible for leading the company’s growth, strategy, and vision. His experience includes almost a decade of enterprise-level systems architecture, digital marketing, and eCommerce strategy for clients including Sally Beauty Holdings, Hearst Corporation, and Charming Charlie. When he’s not working, you can find him playing piano, guitar, or cheering for the Blackhawks.

Credit card processing is a necessary component for almost every business in today's modern economy. Ecommerce depends on it and most people expect to be able to use a credit card at a brick and mortar store. While the process by which credit card payments are processed can be a bit complicated, it is important to understand the steps involved so you can understand any fees you may incur as a business.

In the Store

Credit card processing starts with the cardholder. He or she makes a purchase from a merchant. When the merchant swipes the card, a request is sent to the credit card processor (sometimes called acquirer). The processor then passes that request on to the card issuer to make sure that the transaction amount is covered. If it is, the issuer sends an authorization code to the processor and the processor approves the payment. The payment passes through the merchant's point of sale (POS) system and the customer walks away with the product or pays for the service.

Back Office

What happens "in-store" is just the beginning. The merchant gets lots of authorized sales everyday. In order to get paid for these transactions, he or she has to gather these transactions into a single "batch" and pass it on to the payment gateway. This is usually done at the close of each day. The payment gateway is linked to the credit card processor.

Credit Card Processors

After the batch is sent to the credit card processor, it is passed on through the card network to the issuer. The card networks, like Visa or American Express, function like a clearing house for their respective card brands. For instance, every transaction paid for with a Visa card is passed over to Visa the company. In turn, the credit card company sends each transaction to the issuer. From here, the issuer deducts a small fee, called an interchange fee. This fee is used to recoup processing expenses at the issuer and the card network. The remaining sum on each transaction is then routed back to the credit card processor.

Merchant

The credit card processor then sends the money to each respective merchant. However, the merchant does not receive the full sum. There will be a small discount rate to cover the costs of the credit card processor. At the end, a $100 transaction may end up being less than $98 - $1.70 goes to interchange fees and is split between the card network and the issuer while another $0.50 stays with the credit card processor. These amounts are not set in stone. They may vary considerably depending on the card issuer, the agreements in place and what the merchant has been able to negotiate.

Magento Development

Your ecommerce business needs to contract with a credit card processor in order to take credit card payments online, but you have options. Not all credit card processors are made the same and the difference matters. In addition to small differences in processing fees, you also have to consider how the processor you choose impacts your customers' shopping experiences. If you are ready to take the next step in modernizing your ecommerce and physical point of sale, contact Robofirm. We can discuss ecommerce development services, like Magento, that tie in your methods of processing payments and explore how to create a tailored solution that fits your business uniquely.

How Does Credit Card Processing Really Work?

How Does Credit Card Processing Really Work?

by Ryan Gellis

Ryan is the founding partner of Robofirm and is responsible for leading the company’s growth, strategy, and vision. His experience includes almost a decade of enterprise-level systems architecture, digital marketing, and eCommerce strategy for clients including Sally Beauty Holdings, Hearst Corporation, and Charming Charlie. When he’s not working, you can find him playing piano, guitar, or cheering for the Blackhawks.

Credit card processing is a necessary component for almost every business in today's modern economy. Ecommerce depends on it and most people expect to be able to use a credit card at a brick and mortar store. While the process by which credit card payments are processed can be a bit complicated, it is important to understand the steps involved so you can understand any fees you may incur as a business.

In the Store

Credit card processing starts with the cardholder. He or she makes a purchase from a merchant. When the merchant swipes the card, a request is sent to the credit card processor (sometimes called acquirer). The processor then passes that request on to the card issuer to make sure that the transaction amount is covered. If it is, the issuer sends an authorization code to the processor and the processor approves the payment. The payment passes through the merchant's point of sale (POS) system and the customer walks away with the product or pays for the service.

Back Office

What happens "in-store" is just the beginning. The merchant gets lots of authorized sales everyday. In order to get paid for these transactions, he or she has to gather these transactions into a single "batch" and pass it on to the payment gateway. This is usually done at the close of each day. The payment gateway is linked to the credit card processor.

Credit Card Processors

After the batch is sent to the credit card processor, it is passed on through the card network to the issuer. The card networks, like Visa or American Express, function like a clearing house for their respective card brands. For instance, every transaction paid for with a Visa card is passed over to Visa the company. In turn, the credit card company sends each transaction to the issuer. From here, the issuer deducts a small fee, called an interchange fee. This fee is used to recoup processing expenses at the issuer and the card network. The remaining sum on each transaction is then routed back to the credit card processor.

Merchant

The credit card processor then sends the money to each respective merchant. However, the merchant does not receive the full sum. There will be a small discount rate to cover the costs of the credit card processor. At the end, a $100 transaction may end up being less than $98 - $1.70 goes to interchange fees and is split between the card network and the issuer while another $0.50 stays with the credit card processor. These amounts are not set in stone. They may vary considerably depending on the card issuer, the agreements in place and what the merchant has been able to negotiate.

Magento Development

Your ecommerce business needs to contract with a credit card processor in order to take credit card payments online, but you have options. Not all credit card processors are made the same and the difference matters. In addition to small differences in processing fees, you also have to consider how the processor you choose impacts your customers' shopping experiences. If you are ready to take the next step in modernizing your ecommerce and physical point of sale, contact Robofirm. We can discuss ecommerce development services, like Magento, that tie in your methods of processing payments and explore how to create a tailored solution that fits your business uniquely.