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  • Thomas Cecil

How do Credit Card Payments Work?


Using a credit card is becoming something that is much easier for cardholders to do, as companies like Square and PayPal now allow people to swipe their physical credit cards with mobile phones as well as transact with merchants completely electronically. But, even though these actions look different than the traditional swiping of the card at the cash register, the process on the back-end still looks the same, and is actually much more complicated than one may originally think. So, what, exactly, goes on when you pay with your credit card?

Part 1: The Long Journey to Contacting Your Bank

In any transaction involving a credit card, there are 2 initial parties: the cardholder and the merchant. Obviously, the cardholder hands over their card to the merchant to swipe (whether electronically or physically), and from there, the credit card information is sent to the merchant’s bank. They are the ones that are hoping to get the money for the merchant to keep with them, so now they are essentially the people with the “baton.” They want to get in touch with the cardholder’s bank, to make sure that they have the credit space for this entire transaction. But this is not done directly, and the communication is reliant on the specific details and relationships of the card in question.

The intermediary that facilitates this authorization between banks is called the credit card network, which is a service that is provided by the famous names like Visa, MasterCard or Chase. The network is attached to the card presented by the cardholder, so the merchant’s bank will give the account details of the cardholder to the network, who will then take it directly to the cardholder’s bank. At this point, the bank will need to authorize that this payment is possible, which comes from the simple process of making sure that the purchase will not put the holder over their limit.

Part 2: Retracing our Steps

Now, the cardholder’s bank now needs to alert the merchant, and their bank, that this purchase can happen, and that they can rest easily knowing that they will be reimbursed for providing this product or service. This approval is, once again, taken by the credit card network and transferred to the merchant’s bank, who can now alert their client, the merchant, that the payment has cleared. The merchant (or, rather, the merchant’s computer) will process this information and approve the final transfer of the goods to the customer, thus completing the part of the transaction that involves any sort of human interaction. However, the merchant has yet to officially receive the funds that are to be transferred by the cardholder’s bank.

Part 3: Settling the Transaction Once and For All

If you are a credit card holder, or if you work in a finance role at a place that accepts payments via credit card, you may have noticed that transactions can be labeled as “pending” for some time after they have taken place. This is because, once a day, the merchant sends all of the data for that day, in a “batch”, to their bank, alerting them to the amount that they are owed. Then, using the same channels as before, the merchant’s bank sends this amount to the credit card network, who then sends it to be approved once again by the cardholder’s bank. This bank then transfers the funds through the credit card network to the merchant’s bank, after taking off a small amount, called the “interchange fee.” Then, the merchant’s bank stores this value for the merchant, subtracting a small “merchant discount rate” for their services. Thus, finally, the transaction has been completed.

Overall, this is certainly a lot more steps than many cardholders originally would have anticipated. But, the outcome is still the same – you must be cautious about only spending within your credit limit, or else you risk having your bank return to the merchant with the bad news that you cannot go through with the transaction.

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