How does a credit card work?

For over seventy years, many people have been asking how credit cards work. Invented in 1950, credit cards have changed the landscape of commerce throughout their long evolution. Now they are used more 25% of all transactions. The convenience they provide for pay-later purchases and online shopping has created a whole new way of processing payments.

There are many stages that credit cards go through after your purchase. They are similar for both card and non-card transactions. This process is divided into four main stages: permitting, packaging, clearance and financing.

Step 1: Authorization

The first stage of a credit card is approval. This happens within a few seconds immediately after the purchase. Once swiped, your information will be sent to your merchant account provider. They require authorization from the card issuer. This validates your card information to show that the card is active and available for use. Two other entities are involved in this step. The request is also entered through a trading account.

Once the issuer approves the transaction, the merchant can accept your payment. This step confirms that your card has enough credit to complete the purchase.

Phase 2: Batch

Every day, thousands of payments flow through various transaction channels. This is why many e-commerce merchants choose to submit their payments in batches. It benefits the merchant as they are charged per transaction. The concept extends to a financial practice called microtransactions. These are small payments that can be as little as a few cents. They are bundled together and presented as a unique bundled payment. Some companies choose to submit all their payments at the end of the day in a batch. A processor sorts these payments and they are then sent to the acquiring bank.

Stage 3: Cleaning

Halfway through the payment process is the clearing process. At this point, the transaction went to the processor, then to the acquirer; card networks will go next. These include more recognized names such as Visa and MasterCard. Card networks get their information from what’s called an issuing bank.

The issuer charges the account of the person making the purchase. This fee is then approved and refunded through the payment processing channels. After receiving the request from the issuing bank, the card network sends it to the acquiring bank.

Phase 4: Funding

The final step in a credit card transaction is financing. The acquiring bank deposits the dollar value of the purchased amount into the merchant’s account. At that point, the merchant can see and verify the received funds and the payment is complete.