How Does Credit Card Processing Work?

Credit card processing is much more intricate than it may seem. Discover what happens behind the scenes within seconds of your transaction.

This article contains general information and is not intended to provide information that is specific to American Express products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.

At-A-Glance

When you pay by credit card, it might seem like a transaction that’s kept between just you and the business you’re buying from – but it’s not.

Credit card processing involves additional third-party players and is a much more intricate process – most of which happens in an instant.

In the mere seconds (or even milliseconds) it takes to pay by credit card, it’s hard not to take for granted the technology that makes it possible. But have you ever stopped to wonder how credit card processing really works?

Put simply, your credit card information is transmitted and validated in real time so you can swipe and go – or enter your payment details online – without thinking much about what makes it all possible. But it’s more complex than that. Here’s a behind-the-scenes look at what goes on every time you make a purchase with your credit card.

Credit Card Processing Involves Several Parties

On the surface, making a purchase can seem like a transaction that’s just between you and whomever you’re paying. In reality, your credit card and account details go through a series of checks with several different parties to determine whether your card transaction will be approved and where the funds will go.

Here are the key parties involved when processing a typical credit card transaction:

Card member: You, the shopper who is paying by credit card.
Merchant: The person or business you’re buying goods or services from.
Merchant account: A middleman of sorts that holds your credit card payment since your payment can’t be directly deposited into its final destination, the merchant’s business bank account. A business must have a merchant account to accept credit card payments, which can then be transferred to the firm’s business bank account.
Card member’s issuing bank: The bank your credit card is associated with.
Payment processor: A third party that evaluates the validity of your transaction by communicating with your credit card’s issuing bank and the business’s merchant account in real time.

A Step-by-Step Guide to Credit Card Processing

Now that you have an idea of the many parties involved in credit card processing, here’s a breakdown of how the process works:

You find an item or service you’d like to purchase with your credit card.

You pay by swiping, inserting, or tapping your credit card at the register, entering your payment details online, or sharing your payment info via phone – assuming it’s a safe and legitimate transaction.

The credit card payment terminal or payment gateway, the online equivalent of a physical payment terminal, transmits your credit card and payment information to the payment processor securely and in real time. For more on the technology behind how credit cards work, check out “How Do Credit Cards Work? Demystifying the Magic.”

The payment processor evaluates the transaction’s validity by communicating with your credit card’s issuing bank and the business’s merchant account. The results are instantly sent back to the credit card terminal or payment gateway, depending on whether you’re there in person or online.
Within seconds, a message appears telling you whether your credit card has been approved or denied. If approved, the business’s merchant account bank settles the transaction.

While you receive a receipt and go on your way, the payment processor ensures the funds are taken out of your credit card’s issuing bank and transferred into the business’s merchant account.

The business chooses when to transfer the funds from its merchant account into its business bank account.

You repay your credit card issuing bank when you pay your monthly statement.

The Takeaway

Paying by credit card is so fast and easy that it can be hard to fathom what’s going on in the seconds it takes to pay. Credit card processing relies on an intricate web of multiple parties that communicate in real time to validate your transaction.

Megan Doyle is a business technology writer and researcher whose work focuses on financial services and cross-cultural diversity and inclusion.

All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.

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