27 September 2009

3 Simple Stages Involved in Credit Card Transactions Making It More Convenient and Profitable to Do Business

When your customer purchases something from your store using a credit card, the information and money involved follows a certain process technically called an interchange.  It consists of three basic stages including verification and authorization; reporting, settlement, and billing; and funding.  It also involves another process in case a chargeback is claimed.

Credit card payment process sure does sound complicated, especially with the different parties involved and the different channels consumers can make use of to pay using their credit cards.  The process is technically the same, varying only during verification and authorization process as different terminals are used to do this, such as point-of-sale (POS)  or virtual terminal.  Here are the stages by which credit payments go through  from the moment a purchase has been made to the moment funds are sent as payment to your merchant account:

Verification and authorization

This is the first step in credit card transaction by which your client or the cardholder decides to make a purchase using his credit card.  In retail stores, a client's credit card is swiped on the point-of-sale (POS) terminal, while online stores use virtual terminals wherein confidential credit card information are inputted by a client through a secure website.  Mail Order/Telephone Order (MOTO) and mobile credit card transactions may be done either by installing a POS terminal on the merchant's computer or using a virtual terminal.  The card information is then  transmitted to the credit card processor, who in turn relays it for verification to card issuing companies like HSBC, Capital One, and Citi Cards through credit card networks such as Visa and Mastercard.  Once information and amount have been verified, the transaction, whether rejected or approved, is reverted to the credit card processor, who also gives response to you about the authorization of the transaction.  Once approved, the POS terminal will generate charge slips, which need to be signed by the cardholder.  The client keeps the customer copy, while you keep the merchant copy and retain the bank copy if there is any.  For virtual terminals, a notice will appear on the customer's screen that the transaction has been completed, as well as the corresponding reference number.  A record of approved transactions will also be automatically recorded in your integrated system.  This stage in credit card transaction, regardless of the terminal used, is done almost instantly, making it very convenient for you and your customers.

Reporting, settlement, and billing

So how do you collect from your clients?  First of all, you do not directly collect from your customers.  What happens is that you generate a report of your daily credit card transactions in a batch and send it to your credit card processor.  Otherwise known as batching, this report is usually done at the end of the day.  Your credit card processor forwards the batch to the credit card network, who collects the funds from card issuing companies.  These issuing companies are the ones who collect payments from your customers through the monthly statements of account they generate.  The credit card processor then receives payments usually the next banking day.


Once funds are already credited or paid to your credit card processors, you are now ready receive the payment in the merchant account you opened.  The amount you will receive is usually net of the discount rate, which you pay your processor for every credit card transaction processed.  Other fees are deducted either annually or monthly from your merchant account.  Do care to know about the costs involved  and the payment scheme before entering into a contract with a credit card processor.  In as fast as two to three days, you are now now ready to use the funds from your credit cards sales.

These three are the basic stages that a credit card transaction normally goes through.  However, you also need to know that a further process also applies as to handling chargebacks.  A chargeback occurs when a customer who has been billed or has already paid for his purchase disputes the transaction made.  One of the most common reasons for such dispute is that the customer is dissatisfied of  your product or service.  There is also a possibility that the product he received was not the one described or he has not received any item at all.  Here's how it goes:

  • First, the customer formally makes a complaint to his credit card issuer.  If the issuer finds it invalid, the complaint will be declined; otherwise a provisionary refund will be given to the customer.
  • If the refund is granted, the issuer then claims credit from your credit card processor who in turn relays the complaint to you through a mail notification.
  • Your processor deducts applicable amount from your merchant account, including chargeback fees.
  • If you find the dispute untrue, you may send a rebuttal together with supporting documents and send it to your credit card processor.  Normally, you are given at least ten days from receipt notification to respond to such chargebacks.  If you find the dispute valid, there is no need for a rebuttal.
  • If your credit card processor finds your rebuttal valid, it will forward your response to the credit card issuing company and reclaims the funds for you.
  • The credit card issuing company will then refund the amount and lets the customer repay for the transaction.
  • The amount will then be credited back to your merchant account.

Knowing the process by which every credit card transaction goes through is important for you understand how client information as well as funds are coursed through.  In cases problems arise, you would know who to address your concerns to.  It will also help you understand the nature of some costs that go with credit card processing.  Finally, it will help you realize how the ease and security of the payment process can help make doing business more convenient for you and your customers, resulting to a more profitable business.

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