Credit cards are used by all of us today to when we shop at e-commerce stores as well as brick-and-mortar stores. In spite of using cards so frequently, very few of us understand happens and the elements that come into play in moving money from their account to the business’ account. In this piece, we explain the payment flow for internet transactions.
Kinds of transactions
Credit card processing includes multiple transactions. Let’s look at what these are:
* Preauth transactions: In such a transaction, the validity of the card is established. The rate levied for running this transaction is typically around one dollar.
* Postauth transactions: This is where clients make a purchase that will not be shipped to her immediately. At the moment the order is confirmed, a hold is applied on the client’s card. The business owner runs a postauth to transfer the payment after the order has been shipped. This also removes the hold placed earlier.
* Credit transaction: This is the transfer of currency from the merchant’s account to the purchaser’s. This is needed when a business issues credit for returns etc.
* Sales transaction: Here the client makes a purchase and uses the credit card to transfer money from her account to the merchant’s .
* Chargeback transaction: Chargebacks are instances where a purchaser disclaims a charge made to her card. In such cases, the bank withdraws the amount from the merchant’s account and moves it in the client’s account till the dispute is sorted out. The business is given some days to establish their claim. If they can assure the bank with evidence, the amount is returned to the merchant. Chargebacks cost the business as banks levy a charge for the time and effort involved.
Necessary website infrastructure to support online credit card payments
A website has to be equipped with the fundamental tools required to accept credit card payments. Some of these basic requirements are:
* a “card not present” merchant account
* a gateway account at AuthorizeNet, CyberSource, WorldPay, etc.
* a “vital tear sheet” that needs to be presented to the gateway (provided by the bank)
* affiliation with credit card types such as American Express; this knowledge needs to be conveyed to the gateway
* an SSL enabled server
How does the website credit card processing work?
Following is the stepwise description of how it all happens:
1. The customer confirms her order by submitting a form that collects the credit card particulars. On pressing the “submit button”, the information is transmitted to the server.
2. The server processes the information and is delivered to the suitable software program for card verification.
3. The function of the software is to verify the payment details furnished by the customer. If the information is validated, it sends the information to the gateway for more checks.
4. The gateway checks the validity of the card and the availability of funds. Depending on the result, it sends an “Approved” or “Declined” message back to the software application. This service is charged at a rate that can be a fixed monthly amount or a per transaction rate.
5. The gateway sends the transactions to designated clearinghouses (selected by the bank for a credit card type) in batches.
6. The clearinghouse obtains transactions from numerous gateways, batches them for various banks and moves cash on that basis. This services too is charged a fee that can be anywhere from 2%-5% of the cumulative sale.
7. The clearinghouse moves payments between the banks – customer to merchant.
8. On receiving the transaction, the merchant’s bank moves the cash from the customer’s account to the merchant account. This too comes at a price as the bank or card issuing company will charge a set of fees for a variety of related services – starting the merchant account, discount fee, monthly minimum fee, etc.
This article should clear up the notion that credit card processing is a complicated process. As you can see, credit card processing isn’t so puzzling after all. Yet, because of the multiple approvals and set ups required in this process, merchants are more comfortable paying a credit processing company to manage it. As payment processing rates have come down significantly in the last few years, this option also proves more economical.
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