India Broadband Forum

Rameshjeee

How Credit card transaction works?

Have you thought about what was involved in making a credit card purchase. Most of us use credit cards frequently. We charge our meals when dining out, pay for our gas at the pump, and purchase large, and sometimes small, retail ticket items with our credit cards. But we never think, or even care, about the process running in the background that lets us make these purchases. What actually happens when the merchant runs our credit card through their Point of Sale terminal? Who is actually authorizing the charge payment? What did the merchant need to do to be able to handle credit card transactions?

Steps involved in a normal credit card transaction:

1. Merchant calculates the amount of purchase and asks buyer for payment.
2. Buyer presents merchant with a credit card.
3. Merchant runs credit card through the point of sale unit. The amount of the sale is either hand-entered or transmitted by the cash register.
4. Merchant transmits the credit card data and sales amount with a request for authorization of the sale to their acquiring bank.
5. Point of sale units are usually set to request authorization at the time of sale, and then actually capture the sales draft at a later time.
6. The acquiring bank that processes the transaction, routes the authorization request to the card-issuing bank. The credit card number identifies type of card, issuing bank, and the cardholder's account.
7. If the cardholder has enough credit in their account to cover the sale, the issuing bank authorizes the transaction and generates an authorization code. This code is sent back to the acquiring bank.
8. The issuing bank puts a hold on the cardholder's account for the amount of the sale. Note that the cardholder's account has not been actually charged yet.
9. The acquiring bank processing the transaction, and then sends the approval or denial code to the merchant's point of sale unit. Each point of sale device has a separate terminal ID for credit card processors to be able to route data back to that particular unit.
10. A sale draft, or slip, is printed out by the point of sale unit or cash register. The merchant asks the buyer to sign the sale draft, which obligates them to reimburse the card-issuing bank for the amount of the sale.
11. At a later time, probably that night when the store is closing up, the merchant reviews all the authorizations stored in the point of sale unit against the signed sales drafts. When all the credit card authorizations have been verified to match the actual sales drafts, the merchant will capture, or transmit, the data on each authorized credit card transaction to the acquiring bank for deposit. This is in lieu of depositing the actual signed paper drafts the with the bank.
12. The acquiring bank performs what is called an interchange for each sales draft, with the appropriate card-issuing bank. The card-issuing bank transfers the amount of the sales draft, minus an interchange fee to the acquiring bank.
13. The acquiring bank then deposits the amount of the all the sales drafts submitted by the merchant, less a discount fee, into the merchant's bank account.

Acquiring Bank: A bank that has a business relationship with a merchant and receives all credit card transactions from that merchant. The name of the bank on the swipe machine (Point of Sale Terminal).

Issuing Bank: The bank issuing the Credit Card.

Check out also this for better understanding:
How Visa works?
How MasterCard works?


Other related links:
Credit Card Tips (Credit Card Tips: Use your CC wisely.)
How to lodge a complaint regarding Credit Card Issues (The banking ombudsman scheme 2006)

navgemi

Great work mate.....

Reps for you for your finance & Money matters contribution...

Evander Leopold

yeah, good post mate. reps for u.