How Credit Card Processing Works?

The processing of any credit card is essentially the transfer of funds between a customer, a business, and the relevant banks. There are usually three main phases in the entire process, which include authorization, clearing, and settlement.

In today’s article, we’ll talk about who the main participants are in this process and how the payment cycle actually works. 

Key Participants in First Data Credit Card Processing

First Data (now part of Fiserv) is a global financial technology and payment processing company. It provides secure networks and other merchant services to help businesses accept credit and debit cards and other electronic payments.

The First Data credit card processing works when key participants work together. First, a cardholder initiates the transaction. Then we have a merchant, which is the business that accepts the card. The Acquirer is the bank that maintains the merchant’s account, whereas the Issuer is the bank that provides the customer’s credit card. The processor or the gateway is a technical intermediary that routes the transaction data.

The Process Starts from Authorization

The cardholder first initiates the transaction. He taps or enters the credit card at the merchant’s point of sale. They can also use an online payment gateway. Now, the payment gateway receives this data and then passes it to the credit card processor. Here, the processor routes the same data through the card network to the issuing bank.

Thereafter, the bank performs security and other limit checks. Now, the issuer either approves or declines the transaction and then sends the message back to the chain. If the transaction is approved, a hold is then placed on your credit card’s limit.

Then Comes the Clearing

During the clearing phases, the merchant combines all its transactions at the end of the business day. It then sends them to the acquiring bank. There is also significant communication between the acquiring bank and card networks. They keep coordinating to ensure each transaction is sent to the correct issuing bank.

If they see any suspicious activity, they ban the transaction instantly. It remains this way until the root cause of the issue is resolved. 

Once the bank receives the transaction, it converts the temporary hold into an official charge. This charge appears on the cardholder’s billing statement, which they can see through the receipt or through their mobile app.

The Settlement Phase

In this phase, the card network calculates the net amounts owed. It then transfers the funds from the issuing bank to the acquiring bank. Upon receiving, the acquiring bank deposits the funds into the merchant’s bank account (minus the applicable processing fees). 

Settlement also takes 1-4 business days, depending on your specific processor. Usually, the exact speed depends upon the batch cut-off times and holidays. Similarly, high-risk businesses with a unique payment structure may also need to wait a bit more.

Bottom Line

Credit card processing is complex, with many touchpoints involved. The details we’ve mentioned above will give you a clear picture of how transactions are initiated in the first place and where they finally land.