How It Works – Forbes Advisor

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Find The Best Credit Cards For 2022

No single credit card is the best option for every family, every purchase or every budget. We’ve picked the best credit cards in a way designed to be the most helpful to the widest variety of readers.

When you make a purchase with your credit card, you are usually on your way within seconds. But what happens behind the scenes? When a cardholder makes a purchase by swiping a card or entering their information online, credit card processing occurs quickly before the purchase is approved. Processing involves several parties: the cardholder, the merchant, the acquiring bank, the issuing bank and the card network.

The cardholder plays the first role in credit card processing when swiping, inserting or tapping the card to begin the process. The cardholder also later pays the card issuer for the purchase as it appears on a monthly statement. The merchant, however, is more involved in card processing because it must set up a point-of-sale system provided by the acquiring bank or a merchant service company. Fees are often collected by the acquiring bank for each transaction, which leads some merchants to set up minimum purchase amounts when customers use a credit card.

What Is Credit Card Processing?

Every time a customer swipes a credit card, several behind-the-scenes actions occur within seconds. These actions make up a transaction process and begin the moment the cardholder enters, swipes, inserts or taps a credit card. The processing is complete the moment the transaction reads “approved” or “declined.”

There are several parties involved in credit card processing:

  • Cardholder: The cardholder swipes, inserts a chip card, taps a tap-to-pay card or enters a card number into an online payment portal.
  • Merchant: The merchant is any store or seller who provides goods and services. Merchants provide a card machine for the customer to use to swipe their card and pay processing fees to the bank or card company.
  • Acquiring Bank: The acquiring bank (or merchant bank) sends the card and transaction information to the card network. The accquiring bank may also provide the merchant with the equipment to handle credit cards, as well as a merchant account to receive funds.
  • Card Network: The card network (eg Visa, Mastercard) acts as a liaison between the acquiring and issuing banks. It sends information back and forth and sets any fees or guidelines among the acquiring bank, issuing bank and the merchant.
  • Issuing Bank: The issuing bank is the bank that issued the credit card to the cardholder. It authorizes card details, pays the accquiring bank and charges the cardholder for every transaction using a monthly statement.

How Does Credit Card Processing Work?

Within the few seconds it usually takes for a credit card transaction to be approved or denied, several small steps are taken via an internet or phone line connection. Two main stages make up credit card processing: authorization and settlement.


Card details and purchase amount must be first verified and authorized by the issuing bank. This happens in the few seconds it takes for a cardholder’s credit card to be approved or denied. The message often shows up on the card machine after a cardholder swipes or enters a card.

  • Step 1: The cardholder swipes, taps or inserts their card into a merchant’s card machine to make a purchase. (Or enters a card number if purchasing online.)
  • Step 2: The merchant’s credit card machine sends the card information and transaction details to the acquiring bank (or merchant bank) via the internet or phone line.
  • Step 3: The acquiring bank receives the information and sends it along to the appropriate card network (Visa, Mastercard, Discover or American Express).
  • Step 4: The card network routes the information to the cardholder’s issuing bank.
  • Step 5: The issuing bank receives the information and checks the card details (like card number and CVV code) to make sure the transaction is fraudulent. The bank also ensures the cardholder is in good standing and has enough remaining credit to cover the purchase (or has sufficient funds to cover the transaction if using a debit card).
  • Step 6: The issuer sends a response back via the card network to the acquiring bank.
  • Step 7: The response is received at the merchant’s credit card machine or terminal. If all the credentials in Step 5 check out, the transaction will be approved. Otherwise, it will show a message like “denied” on the machine. The cardholder sees this information right away and finishes the transaction while the response code is stored on the merchant’s machine for stage two of processing.

This process may vary slightly depending on whether the transaction happens in-store or online. Traditionally, merchants set up a merchant account with an acquiring bank and link the point-of-sale system to an account. Merchants can set up accounts with merchant service companies like Square. Doing so removes the need for merchants to set up a direct relationship with an acquiring bank but adds another middle person to the equation.


The second stage of credit card processing—settlement—happens among the merchant, acquiring bank, card network and issuing bank. This process involves much back and forth to debit and credit money from party to party (including processing fees charged to the merchant).

Each credit card authorization is stored in a merchant’s point-of-sale system. Typically at the end of the business day, a merchant sends a batch of authorizations to the acquiring bank. The acquiring bank will then confirm each authorization and send the batch via the card network to the appropriate issuing bank. The acquiring bank will also deposit the funds owed to the merchant into the merchant account (minus any processing fees).

The issuing bank pays the acquiring bank via the card network. The card network debits the issuing bank for each transaction amount and credits the acquiring bank, essentially acting as a middle person between the two.

If a cardholder regularly checks spending activity online, he or she may see a recent charge go from “pending” to “posted” on the account. This usually takes one to three business days as the merchant settles sales with the other parties. The cardholder later pays the issuing bank what he or she owes for every purchase plus any fees or interest accrued as per the card agreement.

Why Do You Need to Know About Credit Card Processing?

While it’s not necessary for cardholders to know every detail about credit card processing, it’s helpful to know what’s going on behind the scenes to better understand what could go wrong.

Acquiring banks and card networks charge a merchant a small fee for each credit card transaction. Because of this, merchants may require a minimum charge if a customer wishes to use a credit card to make a purchase. Merchants may also mark up the cost of goods or services to make up for credit card processing fees (or give a discount if the customer pays in cash).

In some states, laws prohibit merchants from passing credit card processing fees directly to customers and for many merchants, it doesn’t make sense to go to the extra effort to add charges for using a credit card. “Cash only” has become common signage near the register of some (usually small) restaurants, stores or other services when vendors don’t want to deal with credit card transaction fees. If a customer sees a “cash only” sign, it’s a sign that the merchant may be avoiding credit card processing fees and keeping lower prices.

Credit card processing fees allow credit card companies, issuers and, through rewards programmes, even cardholders to profit but this comes at a cost to merchants. Often, merchants will raise prices to account for the additional credit card processing fees they pay. Some states have laws that prevent disccriminating pricing based on payment type, so those who pay in cash or with a check are paying higher prices even though they’re not earning cash back or rewards.

Find The Best Credit Cards For 2022

No single credit card is the best option for every family, every purchase or every budget. We’ve picked the best credit cards in a way designed to be the most helpful to the widest variety of readers.

Bottom Line

Credit cards offer convenience to cardholders, but the back-end communication between the merchant and other parties is impressive. Within the few seconds it takes for a cardholder to swipe a card and sign a receipt, a trove of information is passed among the merchant, acquiring bank, card network and issuing bank to approve the card details and purchase securely. Cardholders aren’t required to know how it all works, but it’s helpful to understand why merchants may set purchase guidelines for customers in their stores or online.

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