How credit card purchases get processed

Payment processing is how a merchant gets paid for credit card purchases. When you make a purchase with your credit card, whether in person, over the phone, or on an e commerce website, the merchant presents the transaction to its bank. The bank, in turn, presents the transaction to the credit card brand, namely Visa or MasterCard. The brand then submits the transaction to your bank, and your bank either approves the transaction or declines the transaction. With approved transactions, the credit card brand then pays the merchant’s bank, and the bank then pays the merchant. At the end of the month, you pay your bank!

The speed at which transactions are processed
This process is completed normally in just seconds, from the time you make your purchase, to the time approval is returned to the merchant through its bank. The merchant’s credit card swiper is connected directly to its bank’s credit card processing system. Telephone processing is essentially the same, and even e-commerce credit card processing is the same. This system is highly efficient. Fraud screening is a part of the process, too, and even this occupies only split seconds in the transaction chain. Of course, transactions can be screened for special handling, and where questions arise about a credit card purchase, you may actually be required to speak with the processor on the phone. This screening process is known as referral, and a referral is a request for additional information by a payment processor before an authorization can be issued.

American Express and Diners Club are different
American Express and Diners Club effectively streamline payment processing by eliminating third parties from the process. Purchases made with American Express and Diners Club are submitted directly to those brands, which handle all sides of the transaction because they are also the credit card issuers. American Express and Diners Club cardholders receive credit cards directly from those companies, and pay the companies directly for purchases made.

PayPal is also a payment processor
Payment processing has taken on a new meaning over just the last twenty years. PayPal has become one of the largest payment processors in the world, but it only came into existence in1998. PayPal serves the same role as a merchant’s bank, by accepting transactions made by credit card, and then processing those transactions in the same way. PayPal, of course, also accepts check purchases and purchases made with funds held in a purchaser’s PayPal account. PayPal has introduced a fascinating new wrinkle in the worldwide payment processing scheme.

There are many other payment processors
Wikipedia cites over 100 different payment processors doing business around the world. Most of those are purely credit card payment processors, but many are patterned more after PayPal, offering payment “wallets,” code-based transactions, and other money transfer methods. Their purpose is often to defeat bank charges for international transfers of money. Of course, all payment processors, with the possible exception of American Express and Diners Club, charge fees for their services. The fees are generally a percentage of transactions processed, and they are normally on the order of 5% or less. Considering the complexity of the process from purchase to final settlement, that fee seems quite reasonable. For those of you interested, Collective Point of Sale Solutions has more information available on their website.

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