How Credit Card Processing Works
A credit card processing account is a line of credit that has been extended to a business who wishes to accept credit cards as a form of payment. Generally these accounts are maintained by a financial institution, though not necessarily a bank.
Today, credit card transactions are authorized and captured electronically and sent via Automated Clearing House (ACH) for deposit. There are various methods for card presentment for payment, dependant on the type of merchant accepting that payment: retail-face-to-face, Internet or Mail Order/Telephone Order.
When a merchant accepts a credit card for payment, the card information is transmitted through the “system” via a gateway, or a service that authorizes payments. Depending on the merchant account provider, this may be the same service provider or a separate service. This gateway allows the credit card transaction to go through a series of steps known in the industry as interchange, where the card issuing bank debits the cardholder’s account the amount of the sale and transfers the money to the processor and then ultimately to the merchant.
In order to accept credit cards, merchants must pay fees to the acquirer, or merchant account provider, based on numerous criteria, with heavy focus on transaction volume and method of processing payments.
Merchants must also take into account what is known as a chargeback when dealing with accepting credit cards for payment. A chargeback is a cardholder dispute. Per Visa and MasterCard rules, a cardholder can dispute a charge on his/her bill for numerous reasons. When a chargeback is initiated, the merchant will be debited for the amount of the dispute. It is up to the merchant to resolve most of these disputes by providing the required documentation to the merchant account provider in order to “represent” the chargeback and win the right to the money. If a merchant fails to provide the necessary documentation or does not represent in a predetermined amount of time, the merchant will lose the dispute and forfeit their right to the funds.
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