What is the Credit Card Purchase Process?

November 24, 2020/ Jarrod Wright /

It’s a common misconception to think that the process that occurs at checkout each time a credit card is swiped, inserted, or tapped, is as simple as flipping a magic switch. The truth is that there are multiple complex steps involved every time a credit card purchase is made. Merchants don’t instantly have access to a customer’s money following a purchase. To complicate matters even further, the customer might also choose to return the item or file a chargeback after a transaction is complete. It’s important to understand that credit card transactions are typically broken down into four main stages: authorization, batching, clearing, and funding. Let’s break these down and see what goes on behind the scenes and at every phase involved in the credit card purchasing process.

Stage 1: Authorization

Authorization is the first step in the credit card transaction process, and lasts only a few seconds. Once a cardholder initiates the purchase, the merchant requests electronic authorization from the issuing bank. Essentially, the merchant ensures through the bank that the card number is valid and has available funds. The authorization request travels from the merchant to the processor via a payment gateway, and then to the card network, who finally forwards the request to the issuer. Once the issuer grants authorization, the card scheme and the acquirer both give the merchant the green light to accept the transaction. Although its name suggests otherwise, the authorization phase doesn’t actually finalize the transaction. The card is simply being confirmed as active, containing enough funds to cover the purchase, and not reported stolen. Even when a transaction is authorized by the bank, though, the purchase might still be the result of fraud and not authorized by the cardholder.

Stage 2: Batching

The merchant is only able to complete the purchase after the issuer has granted authorization. Once it has been authorized, the merchant must still request the bank to provide funds to cover the transaction. This request typically won’t be granted immediately. The majority of eCommerce merchants actually keep authorized transactions in a batch in order be transmitted later as a group. Most will take place at the end of the business day. When the batch is complete, the merchant sends all authorized transactions to the processor to be sorted. Once sorted, the processor sends them on to the acquiring bank.

Stage 3: Clearing

The midway point in the credit card transaction process is called clearing. It’s at this point where the process becomes even more intricate. The acquirer begins by distributing the transactions to the affiliated card schemes, such as Visa, MasterCard, UnionPay, etc. These card schemes take the transactions and distribute them to the appropriate issuer banks. The issuer then charges the cardholder’s account for the amount of each transaction before routing the payments back through the card schemes. The final step involved in clearing is when the schemes transfer the requested funds to the acquiring bank.

Stage 4: Funding

Up until this point in the process, the merchant has not been reimbursed for the original card payment. They have completed the purchase and most likely already provided the goods or services to the customer, but the money is still being transferred. This is where funding comes into the equation. At this step, the acquirer deposits the funds into the merchant’s account, which finally makes the money available for the merchant’s use. Every party in the credit card process charges a fee for each transaction made. When a fee is charged by the acquirer, the issuer, and the card network, the funds are taken away from the final amount that the merchant receives.

When Will the Merchant Receive Their Money?

The length of time it takes for the money from a card transaction to appear in the merchant’s account depends on multiple factors, including:

The day and time when the transaction was made
The location of the cardholder
The issuing and acquiring bank policies
Merchant risk assessment
The industry, product, and service offered

It’s possible for merchants to gauge an average timeline for most credit card sales. But, keep in mind, merchants ought to be cautious even after they’ve received their funds. There is still a possibility that they will lose that money through a returned product or chargeback request. In either situation, the purchase price, including shipping costs, will be taken out of the merchant account and returned to the customer. And, if a chargeback is processed, it means that the customer will be unlikely to return what was originally purchased. In addition to the item or service being lost, the merchant also runs the risk of losing any administrative fines or fees which the bank chooses to impose. Understanding the credit card transaction process will ensure that merchants always have the appropriate funds available when needed. Having this knowledge will reduce the risk of it becoming an unfortunate liability to one’s business and a recurring issue in the future.

Last Update: November 20, 2020

November 24, 2020 960 General

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