We spend a lot of time on our blog sharing tips to help your business succeed. We help you with the marketing as well as the technical aspects of your e-commerce business. However, we’ve never actually blogged about the process of what it is we do: processing credit cards online.
Sure, you accept credit cards on your website — or you’d like to start accepting them — but how many e-commerce and start-up merchants know the credit card authorization process and settlement process?
Basic Credit Card Processing Terms
Before we jump in, there are a few terms you need to know. The terms are pretty basic, and you may already even be familiar with them — I mentioned a few in the Back to Basics Part 3 blog post a couple of weeks ago — but let’s refresh.
Merchant: This is you! A person who sells goods or services.
Merchant Account: A special type of bank account that allows you to process credit cards, debit cards, and electronic checks.
Acquirer: A bank or other financial institution that provides merchant accounts to merchants.
Card Association: The organization (Visa, MasterCard) that sets the terms for credit cards and credit card processing.
Credit Card Issuing Bank: The bank that issues credit cards to cardholders on behalf of card associations.
Cardholder: The person who’s name is on the credit card, and who is responsible for the credit card account.
Credit Card Authorization Process
Although Visa and MasterCard have separate terms and conditions for banks, merchants, and cardholders, they share the same credit card authorization process.
- The cardholder purchases from the e-commerce merchant’s website, submitting their credit card information for request of approval.
- The credit card information goes to the merchant’s server in an encrypted, secure message.
- The merchant’s payment gateway securely transmits the information to the acquirer.
- The acquirer sends the cardholder’s request to the appropriate card association.
- The card association forwards the request to the cardholder’s credit card issuing bank.
- The credit card issuing bank approves or declines the transaction and sends the results back to the acquirer, merchant, and cardholder.
This may seem like a lot of transmitting and forwarding of information, but it all takes just a few seconds from start to finish.
Approved Funds Settlement Process
While the settlement process is more time-consuming than the authorization process, this is the part where you, the merchant, get paid.
- The merchant ships the goods to the cardholder.
- The acquirer sends the information from the approved transactions to the appropriate card association for settlement of funds.
- The card association forwards the settlement request to the credit card issuing bank.
- The credit card issuing bank debits the cardholder’s account.
- The acquirer receives the funds from the credit card issuing bank and deposits the settled funds into the merchant’s merchant account based on the agreed payout schedule.
- The cardholder receives a monthly credit card statement and pays back their credit card issuing bank.
Chargebacks Are a Whole Other Process
As an e-commerce merchant, your customers rely on product descriptions, photos, and reviews to determine the quality of the items you sell. An inevitable aspect of processing credit cards online is dealing with chargebacks — when a customer attempts to get their money back by means of their credit card issuing bank.
I can sit here and tell you all about the reasons why customers initiate chargebacks, and the steps you need to take to dispute them to keep your chargeback ratio low, but we’ve already done that. Read Tina’s blog post, Chargebacks: More than Just A Refund, that shows you the chargeback process as well as the chargeback reversal process.