The credit card payments have grown to be regarded as the very expression of modern convenience. Despite the complexity of the payment process, which involves information being relayed electronically from merchants to processing banks for authorization, capture and deposit, the credit card payments are fast, prevent payees from having to carry along large amounts of cash or else from having to go to a particular store in person, are more secure than debit card payments and almost universally accepted. For merchants, whether brick-and-mortar or online-based, the credit card payments acceptance means a wider customer appeal and has long been regarded as a competitive advantage which should not be ignored – however, the entire process is much more complex for merchants than it is for individual consumers.
Most of us have grown to regard the ability to carry out credit card payments at merchant locations as a simple fact of life, as natural as paying with cash – or perhaps even more so. But we are rarely aware of just how much hassle this entails on the merchants’ part. Thus, to be able to accept credit card payments, the merchants have to contact a bank in order to open a merchant account – type of bank account that allows businesses to accept credit card payments. Such accounts also function as an agreement between retailers, their banks and credit card payment processors for the settlement of credit card transactions.
However, since the advent of the credit crunch, banks have become less willing to provide small business credit card processing services. This has driven an increasing number of merchants to sign up directly either with specialized credit card processors or with independent sales organizations (ISOs), which can provide assistance in obtaining the equipment and the necessary training for credit card payments acceptance. The merchants prefer to establish credit card transaction functionalities as credit card payments and allow cardholders to carry out a payment even if they do not actually own the amount they need for a purchase, as they can take the money out of their credit lines. For merchants, the credit card payment processing is an essential aspect of their activity and they will therefore put a great deal of money and effort into making sure the process unfolds without glitches.
Credit card purchases can be carried out either in stores with credit card payment processing terminals (these are referred to as point of sale, or POS transactions) or online, via credit card payment gateways. In this case we speak of online credit card processing. Due to the high level of technological development, the majority of in-store credit card transactions electronically dispatched to merchant processing banks for payments authorization, capture and deposit. The exchange of payment data and money between the parties is known as interchange.
How does the credit card payment process unfold? When a cardholder makes a purchase, the card’s magnetic strip is read by a credit card reader (also known as terminal), or (in the case of chip cards) the card’s chip is read by a specialized reader. The information thus gathered from the chip or from the magnetic stripe is electronically sent by the merchant to the acquiring bank (the merchant’s bank, which receives the funds in exchange for the product or service which has been bought with the card). The acquirer subsequently contacts the card issuer to check whether the card’s number is correct, as well as whether the cardholder has enough money in his account to make the purchase. This is the credit card processing authorization phase. Once the transaction is authorized, an approval code is issued to the merchant. The code is stored together with the other available transaction details.
Credit card payments
The authorized transactions are sent in batches to the acquirer. Merchants generally submit the data on a regular basis, usually once the business day has ended. The acquirer then dispatches the transactions batches to the credit card processing company, which debits the amount from the issuers and credits the acquirer – in simpler terms, the cardholder’s issuer bank pays the costs of the transaction to the acquirer. Once payment to the acquirer has been made, the acquirer pays the merchant and also draws a fee for processing the credit card payment transactions.
The great thing about the credit card payments is that they can also take place online, allowing buyers to access a wide variety of online merchants and e-shops, irrespective of geographical location. Not only can consumers purchase goods by using their credit cards over the internet, but they can also pay for their utilities online, from the safety and comfort of their own homes, without being forced to waste time queuing at bank branches. A wide variety of utility providers – such as water, electricity and telephone companies – have online credit card bill payment facilities, which not only allow them to cut back-office costs, but also save them millions of dollars every year in paper and postage. Online utility credit card payments have had a significant impact upon the so-called “green” trend which sees utility providers committing to completely eliminating paper bills from the payments equation and replacing them with electronic bills (e-bills or electronic invoices), which can be received, viewed and paid online.
Credit card payments
The online credit card processing is also a dual process, with two main phases, namely authorization and settlement. During the authorization stage, the merchant attempts to verify if a purchaser’s account is in fact valid and whether it can accept the transaction charge. An authorization request is sent from the merchant’s website to the payment processor; the latter forwards the authorization demand to the issuing bank, via which the following information is required: the credit card number and expiration date, the billing address, the CVV number (if entered) and the amount of the order. The issuing bank verifies the amount of the order, approves the transaction if the buyer has sufficient funds in his account and reserves the amount of the order from the total of cardholder’s available credit. In the settlement phase, the credit card sale is effectively processed and funds are transferred from the cardholder’s issuing bank to the merchant’s bank.
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