How Do Merchant Accounts Work?

Credit card processing seems simple enough. However, there are lots of moving parts behind the scenes. Here is a simplified, step by step list that reveals the whole process:

Authorization

1. Your customer presents their credit card (or the card number, expiration date and security code) to you or your employee.

2. You swipe the card or key in the credit card data using either a credit card terminal, a POS system communicating over the Internet or. If this is an online transaction, a payment gateway will capture that data. Irregardless of the method, the data is sent to the merchant account provider.

3. The merchant account provider communicates the card information to the VISA or MasterCard network. Usually this is done via an intermediary, a larger Payment Processor. In our case this is usually First Data or TSYS.

4. MasterCard or VISA asks the cardholder’s bank (issuing bank) if the funds are available. If the funds are available, the transaction will be authorized and the funds will be placed on hold in the customer’s credit or debit card account.

5. The issuing bank informs MasterCard or VISA of the result of the authorization attempt (either authorized or declined).

6. MasterCard or VISA communicate the results of the authorization attempt back to the merchant account provider.

7. You receive the results of the authorization attempt. If the authorization was successful you provide the goods or services to the customer they just paid for.

Settlement

8. At the end of the day you “batch out” the day’s transactions to the merchant account provider. If you are using an Online Gateway or an IP-based terminal the batching is most likely happening automatically. If you’re not set up this way you might want to request “auto batching” from your current merchant account provider. If you are using an older dial-up terminal may have to hit a special button to initiate this process but “auto-batching” should still be available to you.

9. The merchant account provider sends the results to MasterCard or Visa.

10. The Issuing bank adds the transaction amount to the cardholder’s bill and you no longer need to be concerned about whether your client pays their credit card bill or not. Of course there are the issues of chargebacks or a refund that could pop up later. Bottom line: collecting the transaction amount from your customer is the issuing bank’s job.

14. The Issuing bank transfers the money to the Merchant Account Provider, using an ACH (Automated Clearing House) transfer.

15. Your Merchant Account Provider deposits the proceeds into your business checking account.

And so goes the journey of a credit card transaction. Believe it or not, there is more detail I could have added above. However, the list above give a good simplified view of the whole process. Questions? Leave a comment below and I will answer you back or drop me an e-mail.

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