A credit card transaction might seem as simple as a swipe, dip, or tap, but it involves multiple steps and players. Payment processing is how businesses complete credit card and debit card transactions. Payment processing services expedite card transactions, and payment gateways securely transmit data so money from a customer’s issuing bank can be transferred to a merchant’s account. All of this happens in seconds. The end result is a customer who successfully makes a purchase without using cash or a check—and a business that completes a sale.
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How Does Payment Processing Work?
When you use a credit or debit card to make a purchase, a series of actions occur electronically to complete the transaction. Payment processing involves a customer, a merchant/business, a payment processor, payment gateway, bank/credit card company, and merchant account/business bank. On the surface, a credit card transaction seems simple. All you do is swipe and you’re done. But there’s much more to it. During a single card transaction, a payment is processed, verified, accepted or declined, and money is transferred. The entire process takes seconds. Let’s walk through the steps.
Point of Purchase
Point of purchase is when a customer initiates a purchase with a merchant and provides a method of payment, which can include using a debit or credit card, cash, check, or money order. Today, even more consumers are using digital payment methods to make in-store and online purchases. The value of digital transactions globally reached $4.1 trillion in 2019 and is expected to grow by 13 percent each year until 2023.
Payment Processor
Payment processors act as a shuttle, delivering information from the issuing banks’ credit card customers use to merchant accounts, where accepted payments ultimately land. The payment processor validates card security and facilitates the transfer of payment, moving money from the issuing bank to the merchant account.
Issuing Bank
The issuing bank is a financial institution associated with a customer’s credit card.
Merchant Account
When a credit card transaction is processed and approved, the payment processing company facilitates the movement of money from the issuing bank to the merchant account. This bank account enables a business to accept credit cards, debit cards, and digital payments.
