It is not necessary to have an in-depth understanding of how credit card processing works, but it is important to AB Pay that our customers have a general understanding of how the processing works and how we take care of their transactions.
The bank card networks that carry billions of transactions between merchants, processors and banks are a very important advance within this industry. In the blink of an eye, your terminal passes the transaction information to a processor and then through the card network to the bank that sends said information for approval, and then this bank sends an authorization through the network of the card to your processor before it finally ends up in our processing system.
How Credit Card Processing Works
Our customers who are involved in authorization and settlement are the cardholder, the merchant (company), the acquiring bank (the company’s bank), the issuing bank (the cardholder’s bank) and the card associations (Visa and MasterCard).
If you have a credit or debit card, you are already familiar with the role of the cardholder. But it is important that the cardholder is someone who obtains a bank card (credit or debit) from a bank that issued the card. They then present that card at a business to pay for goods or services.
In this case, our clients who accept cards as a form of payment apply, accepting credit or debit cards as payment from clients (cardholders) for the goods or services provided. Our clients, as business owners, are merchants.
Acquiring Bank (Merchant’s Bank)
An acquiring bank is a registered member of the card associations (Visa and MasterCard). An acquiring bank is often called a merchant bank because it hires merchants to create and maintain accounts (called merchant accounts) that allow the business to accept credit and debit cards. Acquiring banks provide merchants with equipment and software to accept cards and handle customer service and other necessary aspects of card acceptance. The acquiring bank also deposits funds from credit card sales into a merchant’s account.
Issuing Bank (Cardholder Bank)
As you’ve probably guessed, an issuing bank issues credit cards to consumers. The issuing bank is also a member of the card associations (Visa and MasterCard).
Issuing banks pay acquiring banks for purchases that their cardholders make. It is then the cardholder’s responsibility to repay their issuing bank under the terms of their credit card agreement.
Card Associations (Visa and MasterCard)
Visa and MasterCard aren’t banks and they don’t issue credit cards or merchant accounts. Instead, they act as a custodian and clearing house for their respective card brand.
The primary responsibilities of the Card Association are to govern the members of their associations, including interchange fees and qualification guidelines, act as the arbiter between issuing and acquiring banks, maintain and improve the card network and their brand, and, of course, make a profit. That last one has become even more important now that Visa and MasterCard are public companies.
Credit card authorization
This is how the credit card authorization process works
A cardholder begins a credit card transaction by presenting his or her card to our clients as payment for goods or services.
Then our clients or merchant uses our gateway to transmit the cardholder’s information and the details of the transaction to their acquiring bank, or the bank’s processor.
The acquiring bank (or its processor) captures the transaction information and routes it through the appropriate card network to the cardholder’s issuing bank for approval.
Visa / MasterCard Network
MasterCard transaction information is routed between issuing and acquiring banks through MasterCard’s Banknet network. Visa transactions are routed through Visa’s VisaNet network.
The credit card issuer receives the transaction information from the acquiring bank and responds by approving or declining the transaction after checking to ensure that the transaction information is valid, the cardholder has sufficient balance to make the purchase and that the account is in good standing.
Visa / MasterCard Network
The card issuer sends a response code back through the appropriate network to the acquiring bank (or its processor).
The response code reaches our client’s gateway and is stored in a batch file awaiting settlement.