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Online Credit Card Processing - How It Works


Credit Card Processing - Parties

An online credit card transaction involves with several parties.

The Cardholder An customer who obtains his/her Credit Card (Visa, MasterCard or Discovery) from an Issuing Bank.
The Issuing Bank The bank that issues the credit card to the Cardholder.
The Merchant A business who obtains a Merchant Account from a Sponsoring Bank or a Merchant Bank.
The Merchant Bank A bank that sponsors a business as a qualified merchant to accept credit cards.
The Processor A company that processes the credit card transactions through the bank system for the Merchant banks.

A commercial bank can function as both issuing bank and sponsoring bank, while a credit card processor usually sponsors merchant accounts.

Online Credit Card Processing - Steps

An online credit card transaction is completed in a few seconds, but it goes through several steps.

1. Request When a Web user (a cardholder) fills out an online form and clicks a submit button, the request is sent to a Payment Gateway. A Payment Gateway is a computer system operated by a processing company.
2. Request Forwarding The Payment Gateway transmits the request to the issuing bank.
3. Verification The issuing bank verifies that the account number is valid and that the transaction amount does not exceed the cardholder’s credit limit. The authorization also puts a hold for the funds on the cardholder’s credit limit.
4. Authorization The issuing bank authorizes the amount requested.
5. Settlement The processor instructs the issuing bank to deposit the net settlement amount into merchant's bank account at the sponsoring bank.

Related Topics
Choosing Online Payment Options
Online Merchant Account - Basics, Costs and Alternatives
Merchant Account Requirements - Bank Account, Business Registration and Phone Number


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