How does credit card processing work?
In laymans terms, once the credit card details have been captured the transaction must be authorised by the bank.
If the card is valid and the customer has sufficient funds available, the bank will reserve the funds and return an "authorisation code".
This code is an assurance to the merchant that the bank will reserve the stipulated amount of money on the cardholders account for a period of time. (approximately two weeks).
In the event of a fraudulent transaction however, the risk will lie with the merchant; so it is imperative that you take every precaution to try and ensure that the card holder is who (s) he claims to be.
As soon as the merchandise has been despatched to the customer, the merchant processes the settlement transaction. (This can be done automatically and/or immediately). At this point the money is transferred from the clients to the merchants account.
In a point of sale environment the authorisation and settlement takes place at the same time.
How does online credit card processing work with e-commerce stores?
One of the most confusing credit card processing concepts for online merchants
is the difference between the "payment gateway account" (the online card
processor) and "internet merchant accounts". Though these are two separate
components of credit card processing, they are both necessary and work together
to handle payments automatically.
Commercially available shopping carts will typically have configuration settings
allowing a number of gateway choices. An internet merchant will usually want to
select the shopping cart and web site hosting company and then order their
merchant account based on the gateways that are available in the shopping cart.
The following information diagrams the typical payment process from the time the
order is placed in the shopping cart to the funds being deposited in the
merchant's bank account.
Internet Merchant Accounts are separate bank accounts for the merchant that are
approved and capable of receiving credit card payments from credit card
providers. Internet merchant accounts typically do not hold funds for an
extended period of time such as your typical bank account but usually transfer
payments to another bank account designated by the internet merchant on a daily
basis.
The Payment Gateway Account is the online credit card processor or transaction
handler which is capable of hooking into credit card accounts belonging to the
online shopper and the merchant's internet merchant account (above). The payment
gateway handles the verification and transfer requests. The term account when
used with "payment gateway" is not a funds holding account but rather a "service
account" that typically has a log in where you can configure your payment
gateway settings.
Alternative Payment Methods include person to person payment services such as
PayPal.
1) The consumers complete their orders via the merchants web store. This should
be done on a secure web page so that the consumer's personal information
including banking information (credit card or check) is encrypted so that it
can't be intercepted and read by third parties while being transferred over the
internet. Secure pages should always be used while handling credit card
processing online.
2) The shopping cart program on the web host computer gathers the order
information, compiling it into a form that the credit card processing company
expects.
3) The shopping cart transmits the formatted order from the web host to the
credit card processor (payment gateway). The credit card processor checks that
the information it received about the order to be sure it has everything it
needs to continue processing the transaction. It then determines what company
manages the customer's credit card and transmits a request for the card to be
charged.
4) The customer's credit card company validates the card and the account. If
everything checks out correctly and the credit card is clear for purchases the
credit card company sends an acknowledgement back to the card processor that the
amount requested can be transferred. If the credit card company denies the
charge it sends a code back to the credit card processor indicating what the
problem was.
5) The credit card processor now tells the shopping cart program at the web host
whether or not the transaction was successful (the shopping cart then can tell
the customer whether or not the order was complete and send the order on to the
merchant for delivery of the product or service). The credit card processor
initiates a funds transfer (settlement request) to the merchant account company
for deposit into the merchant's bank account that it has on record.
6) Internet merchant accounts collect the funds for a specified period of time
and make scheduled transfers to the merchant's regular bank account and the
credit card processing transaction is complete.
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