How do Credit Cards Work?

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Using a credit card is like getting a loan. Every time you charge something, you’re borrowing money until you pay it back later that month, or over time.

How does a Card Swipe Work?

There are many players involved in a Credit Card transaction. Let’s get familiar with them to understand the process better

The Players

1. Cardholder – That’s you! Rather, a person who owns and uses a Credit card
2. Merchant – That’s the vendor that you purchase stuff from
3. Acquirer – An acquirer is a bank or financial institute that accepts (or acquires) credit card payments. from the “Issuer”. An acquirer is the organization that processes the credit payment for the merchant.
4. Issuer – An issuer is the bank or financial that offers (or issues) the credit card to the customer. It also decides the credit limit that a customer can avail. Eg. Citibank, HDFC, etc

Credit Card Payment Process

Now on to the process of how a credit card payment transaction works?

• Step 1 – The cardholder swipes his credit card to make the payment for a product/service
• Step 2 – The merchant submits the transaction to his acquiring bank (Acquirer).
• Step 3 – The acquirer sends a ticket to the Issuing Bank (Issuer) for payment.
• Step 4 – The Issuer checks the customer’s account for his credit limit and standing. On approval, it bills (or charges) the customer’s card for the purchase, and sends an authorization code to the acquirer for the purchase.
  This is the point where the payment gateways come into play. Till this point, no money transfer has been made to any party.
• Step 5 – The acquirer, on receiving authorization from the issuer, forwards the authorization code and payment details to the merchant, and credits the merchant.
• Step 6 – The acquirer is paid by the issuer though a secure payment gateway.
• Step 7 – The issuer is paid by the customer. (Credit card bill)

Things to make a note of in this process

1. Money transfers only begin when all the concerned parties have the required authorization codes.
2. All communication takes place though secured payment gateways such as Authorize.net
3. All payments are made through secure payment processors.
4. The merchant’s bank (the acquirer) keeps a small portion of the money, for the service/transactions rendered.
5. The issuing bank makes money by charging the customer as well as by the network for handling the transactions.
6. The issuing bank is the consumer’s point of contact, and it handles their payments and provides them service.

The process of credit card transactions is ever evolving, with more and more players being added to the mix, thereby simplifying the process and enabling safer and secure transactions.