Credit Card Processing: How Does It Work?

When thinking of credit card processing, you need to focus on all the participants:

The Customer and the Merchant

The customer is the person who owns the credit card. A merchant is a person selling the goods. It could be a store, vendor, or an individual selling a product.

Point of Sale (POS)

POS is a debit or credit card reader (machine) or scanner that accepts a sale.

Payment Gateway

It is an eCommerce application service that approves a credit or debit card sale.

Payment Processor

It is a third party that handles debit or credit card transactions from various channels.

Credit Card Network

It collects data from the payment processor and verifies the balance on the card.

Card Issuer

A financial institution or bank that offers credit to consumers is a card issuer.

Here is how it works

  • A customer or cardholder buys something from the merchant
  • The seller swipes the card through a card reader (POS). For online shopping – payment gateway
  • A payment processor picks up the notification from the POS and sends it to a network
  • The credit card network contacts the card issuer to check the balance on the account
  • The network receives an authorization code if the bank okays the sale
  • The seller (merchant) receives the code from the network to verify the sale
  • The merchant approves the transaction based on the code from the network
  • Then the customer or cardholder receives the product

Image: / Olha Tsiplyar