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Credit Card Processing: The Working Mechanism Behind the Whole Process

Although comprehensive knowledge of the inner workings of the bankcard system is not required, there is no harm in knowing it. Understanding how things truly function is a wise method, as fees are incurred at some point.

The following are the main components of the entire process:

1. Important players
2. Authorization of credit cards
3. Clearing and settlement of credit cards

Credit card processing services are so swift and efficient that transaction details are forwarded from the terminal to a processor in a matter of seconds. This information is then transmitted to the issuing bank via the card network. Following this, the issuing bank sends an authorisation back to the processor through the network.

Obtaining authorisation for a transaction remains the initial step in the entire system. Before the sales are paid into the business’s bank account, the authorizations must be settled. The two key transaction stages are settlement and authorisation. If this occurs, a failure, whether whole or partial, results in sales not being deposited or additional expenditures.

The Important Players

Authorization and settlement key actors include:

1. The customer
2. Provider of Services
3. Purchasing Bank
4. The Issuing Bank
5. Card Organizations (Visa and MasterCard)

Let’s go over each player individually.

1. Cardholder: A person who obtains a credit or debit card from an issuing bank. The card is then offered to merchants in exchange for services or merchandise.

2. Service Provider: A service provider is a company that sells services or products. It can also be described as a firm that accepts both credit and debit cards.

3. The service provider’s bank: Also known as an acquiring bank. This is because it allows businesses to take credit and debit cards and opens and maintains accounts. Furthermore, these banks give retailers software and tools for accepting promotional materials, cards, and other critical aspects required for card acceptance.

4. Issuing Bank: An issuing bank is a bank that issues credit cards to customers. It is critical to understand that this bank is a member of the card associations. These banks compensate banks for sales or purchases made by cardholders. The cardholder is responsible for repaying the issuing bank in accordance with the terms of the card agreement.

5. Card Associations: Because MasterCard and Visa are not banks, they act as a watchdog and clearing house for their respective card brands. Furthermore, they keep an eye on the community of ISOs, MSPs, and financial institutions that collaborate to enable credit card processing and electronic payments.

This was all about the critical aspects of credit card processing. Keeping these crucial points in mind is quite beneficial in maintaining transparency in the credit card processing method.

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