PAYMENT PROCESSING 101
Who are the Participating Parties in Credit Card Processing?
There are a few main players involved in the payment process:
THE ISSUING BANK: This is the bank that provides the customer with his or her credit card. The issuing bank receives most of the interchange fees charged by the card brands.
CREDIT CARD BRANDS: Visa®, MasterCard®, Discover® and American Express® fall into this group. These companies work with governments to determine rules regarding card use, acceptance and security, as well as determining the interchange rates.
PROCESSOR: The processor helps transfer all of the information to the card brands and banks. Businesses are connected to the processor through the hardware or software they are using, and when they run a transaction the information is routed to the appropriate network. Then when a merchant “batches” or closes out for the day, the funds are moved from the Issuing Bank to the merchant’s bank. They will then calculate the interchange fees and provide the data to the merchant and the card brands.
PAYMENT GATEWAY: A payment gateway connects the payment technology (terminals, shopping carts, etc.) and the card processing networks. This can be integrated into your current solution with an Application Programming Interface (API).
SPONSOR BANK: The sponsor bank is responsible for getting the funds to the merchant and ACH payments to the processor. They are also responsible for paying the card brands and the issuing bank their share of the interchange fees.
What is Payment Processing?
At its core, payment processing is the automation of electronic payment transactions between merchants and customers. Payment technologies help process, verify and accept or decline credit card transactions through specialized hardware and software.
How do Credit Card Transactions Work?
1. When a merchant runs a customer’s credit card, the data is sent with an authorization request to their processing company.
2. The processor then routes the information to the the card network and on to the customer’s credit card bank. The bank will then either approve or deny the transaction, and send the result back to the processor.
3. Once the processor has the approval or decline, they send the information to the payment gateway.
4. The settlement network can now transmit the data from the cardholder’s bank, or issuing bank, back to the acquiring bank, which routes the approval or denial code back to the merchant’s payment acceptance application.
5. The acquiring bank performs what is called an interchange for each sale, with the cardholder’s bank. Then the card-issuing bank transfers the sale amount, minus the interchange fee to the acquiring bank. The money is then deposited into the merchant’s account by the acquiring bank, minus a discount fee.