This article series provides information about how ecommerce credit card processing works.
Nowadays millions of people use credit and debit cards to buy goods and services, but few understand how they actually function. In this guide, we'll explain the process in detail so you can learn the part you play as an online business owner. We'll teach you what you need to know, including how money moves from the cardholder to you, and how a payment gateway fits in. Then you can focus on what's important: making money and protecting yourself against loss.
Behind the Scenes
In the example we considered previously in this series, if you paid for the shirt with a credit card, you'd have to repay your issuer. Your cardholder agreement with the issuer determines your repayment schedule and interest rate, just like the account credit limit. If you paid with a debit card, money you deposited with your bank is already removed from your account to cover the purchase. But in either case, the exchange of funds doesn't happen immediately.
When you swipe your card through the reader or insert it, the reader uses the data coded in card's magnetic stripe or chip to ask the issuing bank if the account is open and contains enough funds. If it does, the transaction is authorized. If it doesn't, the transaction is declined.
If you've ever looked at an online account statement, you may have noticed that the most recent charges are listed as "pending" and have no associated transaction dates. That's because merchants don't receive authorized transaction funds automatically. All transactions pass through a temporary state during which the funds are no longer available to the cardholder, and the merchant can either capture (accept) them or void (reject) them.
If the merchant captures a transaction, the finalization process begins. If the merchant voids it, the pending transaction disappears from the cardholder's statement and the funds return to the account spending limit. The same happens after a set period of time (chosen by the card issuer, but usually seven days) if the merchant takes neither action.
After the shirt purchase, the authorized transaction remains stored in an open batch of transactions within the card reader until the end of the business day. At that time, the merchant closes the batch and submits all authorized transactions to their merchant bank for settlement. This is the capture process. At that point:
- The merchant bank funds the merchant's account.
- The issuing bank reimburses the merchant's bank.
- The issuing bank removes the pending status from the cardholder's transaction.
- The transaction is finalized:
- With a credit card, the issuer adds the transaction to the cardholder's statement of transactions to be repaid.
- With a debit card, the issuer removes the funds from the account.