From the customers' point of view, a transaction process of a credit card looks simple. We swipe the card, put authorization PIN and the payment is done within a few seconds. But behind every swipe, there’s a lot of thing happening which we don’t know.
It is a very complex process. We can only see the initial and the last steps of a credit card transaction. But we usually don’t know what was going on within the last few moments. And that is the reason, sometimes our payment gets denied.
There are multiple steps and process working behind a successful credit card transaction.
You might think, if we can’t see the in-between process, then what’s the need to know it now?
Why are we discussing it even?
Actually, having a good knowledge of the credit card transaction process is very important for every customer. With the detail knowledge, you can find out the issue that causes your payment denial,
Apart from that, from a small business to a big organization, business owners also try to confront the cost of credit card payment processing.
So, to justify that cost, we should know what is going on in the process after every swipe.
First, we need to know about the parties involved in a credit card transaction
Before plunging into the process of a credit card transaction, first, let’s know how many parties or key players are involved:
a. Card owner – There might be two categories of card owners. First one is the person who pays the balance in full; the second one is who pays only a portion of the balance.
b. Business merchant – Merchant denotes the party who receives the money. Normally it is the vendor or store which provide services or sell something to us.
The merchant conveys the card information to the card issuers bank for payment authorization.
c. Merchant’s bank – This bank receives the payment authorization request from the merchant. This bank also channels that request to the credit card issuer bank. Merchant’s bank also sends the status message about the payment to its merchant.
d. Credit card issuer bank – Act as a financial institution and issue credit cards to its customers for making transactions.
As a key party of the credit card payment process, issuer bank receives the payment authorization request through the network and accepts/declines the card transaction.
e. Credit card network – The network operators who process worldwide credit card payments and also regulate interchange fees.
For example - Visa, MasterCard, Discover and American Express.
Now it’s time to understand the types of credit card payment systems.
We’ll primarily talk about 3 types of credit card payment systems which are quite popular in the industry. These payment systems process multiple types of transactions. Customers also prefer a variety of payment modes to ease up their shopping.
So, the payment systems are:
- Standalone terminals
- Virtual terminals
- Cellphone processing solutions
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Standalone Terminals
| Terminals are the magnetic ports or readers where we swipe or slide the card while making the payments. |
So, standalone terminals mean the devices we see at retail stores.
When a merchant swipes the card in the “terminal”, your card information is received and sent to the bank through a phone network connection or via a high-speed Ethernet network cable. If the payment is accepted, then the money is credited to the merchant's account.
Terminals are designed as a plug-and-play device, which can be easily plugged into a computer and they become ready as part of the system.
What can a standalone terminal do?
A standalone terminal can primarily process:
- Credit card payments – You can make payments of your purchases by using a credit card.
- Gift card payments – While buying something you can redeem the gift cards and make the payments.
- Check verification – A customized terminal that can be used to verify checks.
- Check conversion - Merchants may perform check conversion by using point-of-sale (POS) terminals. A specific routing number and account number is printed on paper checks by magnetic ink. Those checks can easily be read by check conversion machines.
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Virtual terminals
| Virtual terminals are used for making online credit and debit card payments and money transfer. |
It is widely used by the people who buy some commodities online through monthly installments.
People can access a virtual terminal from anywhere and can make online money transactions via a PC or cell phone.
It can be used anywhere on the planet where there is an Internet connection.
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Cellphone processing solutions
Merchants who provide mobile business services, such as, pizza delivery guys, goods delivery drivers, or an antique dealer, may use this terminal for accepting payment.
| These terminals are designed to work using Wireless Application Protocol (WAP) technology. |
Merchants use a WAP-enabled phone to receive your credit card information and send it to the processor.
The network connection is totally based on the satellite connection. So the merchants prefer using that terminal in areas like big cities, towns, where they can get that signal easily.
Now let’s go deep into the credit card transaction process.
Credit card transaction process:
There are multiple platforms which are being used to process credit card transactions. Whenever you swipe your card and get the money receipt, the total process takes just 2 to 4 seconds. But if you check, there are 3 important stages through which the credit card transaction takes place.
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Authorization
In this stage, the merchant gets the approval for payment from the issuing bank. When the cardholder presents the card to the merchant, the merchant swipes the card using the point of sale (POS) terminal. The card details are sent to the concerned bank through the internet connection. The bank then forwards the details to the credit card network for clearing. The issuing bank receives the request for payment with these details:
◦ 16-digit credit card number
◦ The expiry date of the card
◦ Billing address
◦ 3-digit CVV number
◦ Payment amount
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Authentication
The issuing bank receives the details and verifies the validity of the card, address, available funds, and CVV number. After the verification, the bank may accept or decline the payment with proper feedback. The response is sent back through the same medium.
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Clearing & settlement
After the payment is done, the payment is posted both in the cardholder’s monthly credit card statement and the merchant’s bank statement. Merchant normally sends total approved authorizations in a batch to the acquiring bank. The bank transfers the batch to the credit card network for settlement.
Through the credit card network, each payment request goes to the concerned issuing bank, and within 24 to 48 hours, the merchant receives the payment excluding the “interchange fee” (2.35% plus $0.15 per swipe), markup charge over the interchange fee (between 20% to 25% of the total card processing cost), and “merchant discount rate” (between 2% to 3%).
The payment cycle is complete, and the merchant gets the payment.
Transaction details are listed in the merchant’s bank account and also to the card holder’s account. Now the ball is in the cardholder’s court. He/she will have a certain period (approx. 40 days) to pay the credit card bill.
| A customer may dispute a charge on his/her credit card billing statement within 60 days of the date of statement generation. |
It is treated as a complaint against the merchant, so the issuing bank will charge $10 to $50 as a penalty to the merchant. If the merchant fails to attend the “retrieval request”, additional fees may be charged to them.
We have talked about the parties involved in a transaction and discussed the system and process and explained the fees, now, let’s talk about the final matter!
When your credit card transaction gets declined and how to avoid it
| There are two types of credit card declines.
1. Soft declines - When the issuing bank approved the fund but the transaction fails due to another reason. 2. Hard declines - When the issuing bank rejects the payment process totally. |
There are few critical reasons due to which your credit card issuer may decline your transaction:
a. Your card has expired - People sometimes forget to remember their credit card expiration date. Once it is expired, you won’t be able to use it for transactions.
Solution - Track the expiration dates of your credit cards well in advance. Send a renewal request to your credit card issuer company. Ask them to issue another one if they can’t renew the card.
b. You’ve finished your available credit - If somehow you reach your credit limit, and you need to make further payment, your transaction will be declined automatically.
Solution - You must keep a track on your spending. Normally it is suggested that you must cap your credit usage below 30% of your credit limit. If you’ve reached your limit already and still want to use the card for payment, you should pay off some balance or ask your credit card issuer to increase your credit limit.
c. You’ve forgotten to pay credit card bills - Missing payments on your credit card is not good for your credit history. But do you know that if you are too busy to pay off your monthly credit card balances, someday your transactions might be declined when you are in the middle of an emergency situation? And it’ll take time to reboot the payment system again.
Solution - Always pay off your dues on time. Set reminders for credit card payments. Keep auto-payment system active in your bank account to pay off the credit card bills.
d. Your transaction was suspicious and triggered fraud protection - Suspicious activities can block your card. For example - if you buy a large number of jewellery or similar electronic goods in a bulk, it may trigger a fraud alert. Your unusual spending pattern may influence the credit card company to put your payment on hold.
Solution - Don’t worry. You can still buy a large amount of gold or your favorite electronic goods at a time. You just need to inform your credit card company and authorize the purchase.
e. Your credit report has taken a hit - Drop on your credit score is terrible! Your financial habit somehow may influence your credit score. Even if you are current on your credit card payments, other financial aspects of your life may hurt your credit score badly. With a bad credit score, credit card issuers may reduce your credit limit, and your card may get blocked. Being a risky customer your credit card interest rate can also be increased.
Solution - Change your financial habits. Pay bills on time, use credits as low as possible, use cash to buy things, avoid luxury items, and most importantly...pay off your old debts as soon as possible, starting with the higher interest debts!
f. You are trying to make a purchase from a foreign country - Last minute booking for a foreign country shopping may cause you a freeze transaction. Online purchase from an international brand may also stop the transaction.
Solution - Always call your credit card issuer before making such purchases. Alert your bank before going abroad . Take a prior authorization before buying foreign brands online.
So, in this discussion, you have known all about credit card payment systems, why your credit card payments might decline, and what you must do to avoid such problem.
One more thing I would like to add.
If you are an authorized user of a credit card, and the primary user such as your partner, or your father, or husband make changes in the account, your card might be deactivated without your concern.
So, keep the communication alive so that you’ll know such information prior to humiliation.