Millions of people use credit and debit cards every day to buy goods and services, but few understand how this process works. In this guide, we'll explain everything 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.
Behind the Scenes
If you paid for a t-shirt with a credit card, you have to repay your issuer. Your cardholder agreement with the issuer determines your repayment schedule, interest rate, and 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 instantaneously.
When you swipe or insert your card through a card reader, 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.
Capture vs Void
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. Funds will be automatically returned to the cardholder 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.