You visit a store and swipe your card, allowing you to leave with your chosen goods. What happens between your swipe and the approval message? This same process is at work when you make a purchase online or when someone makes a purchase at your online store. Understanding how this process works will enhance your ability to design a seamless sales process for your store. If you do not have any type of store, this understanding can satisfy your curiosities about how credit cards are processed.
How Does It Work?
At first, credit card processing can seem like a confusing maze to both store owners and patrons alike. The payment gateway is one of the most complex fields within the financial industry. Understanding this process is specifically important to store owners, because if they understand how the process works, they can then select a merchant account that will optimally work with their storefront, as well as charge reasonable fees. To best illustrate how credit cards are processed, it is worth examining a story about a customer making a purchase. This story can also be easily translated to an online storefront:
1. A customer walks into the store or visits the website.
2. They look around and select $20 worth of merchandise they’d like to buy.
3. The customer approaches the counter, or online shopping cart, and enters their credit card information. As the card is swiped and information is analyzed, the process begins.
4. The customer’s information is recognized, including who they are and which company they bank with. The issuing bank is then contacted.
5. The customer’s bank then transfers $20 to the credit card processor, commonly known as a payment gateway.
6. The payment gateway deducts a fee, which is typically a percentage. The exact fee will vary depending on the payment gateway. In this example, the merchant account has a 2% fee. This means $.40 is deducted.
7. The remaining funds of $19.60 are transferred to the storeowner’s bank account. The $.40 is then split between the customer’s bank and the payment gateway.
Please note that the numerical figures used in this example are strictly theoretical. In reality, each bank and credit card company will have their own percentages that will be deducted. For example, the storeowner may have to pay more to process an American Express card as opposed to a Visa.
Common Participants Throughout the Process
The above example introduced the many participants involved in processing a single credit card payment. Each participant may charge their own fees and have their own processes. Having a deeper understanding of each participant will help clarify the roles and responsibilities of each of them:
- The Customer – The individual making the purchase and providing funds.
- The Merchant – This is the storeowner; the one selling the goods.
- The Payment Gateway – The company employed by the merchant to process credit cards and checks.
- The Acquiring Bank’s Processor – This is the payment gateway that is used by the bank; they will be gaining the funds from the customer.
- The Customer’s Credit Card Company or Bank – The bank that will be deducting funds from the customer’s account.
- The Merchant Account’s Bank – The bank that hosts the merchant’s business bank account. This will be the end source of the funds, in addition to fewer fees from the payment gateways, processors and banks.
As you can see, there are six participants involved in a typical transaction. The fees attached to each participant will vary from company to company, and are typically a less than a few percentages of the final sale. These financial institutions make money by processing millions of transactions per day, minimizing the cost of a single transaction on the merchant.
Fortunately, due to broadband internet connections and cutting- edge processor technology, the entire process can be completed within a few seconds.
Credit Card Processing, Demystified
Now that you understand how credit carts are processed, you can begin to evaluate your current payment gateway and ensure that they are the best gateway for you. You may be able to save money on processing fees by considering a different payment gateway. If you still have some questions, click here to read more about the various capabilities of the entire process directly from a world-renowned payment gateway.
About the Author: Jeremy Simmons is a contributing writer and financial enthusiast. He appreciates the intricacies of how online payments are processed, as he has used this understanding to help streamline the payment process on his own online store.