A place of business that accepts credit card is called “Merchant.” The Merchant should open a “Merchant Account” with a “Merchant Bank or Sponsoring Bank or Acquiring Bank” to be able to accept credit cards.
This is the bank that receives the “Net Settlement Amount” from the Issuing Bank after the transaction is processed. The Net Settlement Amount is the amount of the actual sale minus transaction fees called the “Discount Rate.” There are times when the merchant has to pay “Pass-through Fees” because the transaction doesn’t meet some requirement.
The Credit Card Processing Steps
A transaction begins when the magnetic stripe on the back of the credit card is passed through a credit card terminal, or the credit card account number is entered into the system manually by either the merchant or the cardholder. This would enter the transaction information into the Processor’s network.
An “Authorization Request” is generated.
The Processor would link with the Visa/MasterCard network to transmit the Authorization Request to the Issuing Bank’s computer network.
The Issuing Bank verifies that a valid credit card number has been received and that the Cardholder has enough money available (“Open to Buy”) to fund the transaction.
There would be a “hold” on the Cardholder’s Open to Buy, reducing the amount of his Open to Buy for future transactions.
When the approval is received, a “Deposit Transaction” is transmitted, which would finalize the transaction. The merchant then releases the items purchased by the Cardholder.
The Net Settlement Amount will be deposited to the Merchant’s account by the end of the same business day.
When Errors Occur
There are times, however, when the process hits a snag and human beings have to get involved. The Visa/MasterCard network is 100% computerized, but it is programmed with numerous trigger that will route the transaction to a human being.
The most common triggers are.
Spending patterns that are unlike the Cardholder’s usual purchases. Buying of products or services that are considered to be “high fraud”. Purchases abroad. There are some Card Issuers who require their Cardholders to tell them if they will travel abroad.
What’s really amazing is not that the entire processing cycle is flawlessly repeated millions of times per hour, but that it all happens in just seconds!
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