If you own a business, you should know how credit card processing works. Understanding how credit card processing works can help you save money because each stage incurs different fees.
How Credit Card Processing Works
Credit card processing can be broken down into three stages:
- Authorization
- Capture
- Settlement
Authorization
The first step is getting the transaction approved. When you swipe a customer’s card, or they make a purchase on your website, you initiate an authorization.
During the authorization process, your terminal or payment gateway sends the transaction details to your customer’s bank, the issuing bank. If your customer has enough money available, their bank will usually send back an approval. This entire process only takes a few seconds.
For online transactions where the card and customer are not physically present, banks scrutinize these more. Banks make a point to review more information including the client’s billing address and credit card security code to prevent potential fraud. Therefore, mismatches may result in declined transactions.
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Capture
Throughout the day, you will gather many authorizations. These authorizations are pending sales because the money has not moved yet.
Therefore, the capture stage occurs when you batch. Batching is the process where you submit, or capture, all your authorizations to your merchant account provider. After you batch, the money starts to move.
Batching every day is important. You can set your terminal to batch automatically or manually. I advise you set up automatic batching in case you forget. Your rates can increase the longer you wait. Interchange rates can increase if you wait three or more days to batch. If you are on tiered pricing, then your transactions may get downgraded to either the higher mid-qualified or non-qualified tiers.
Settlement
The final stage of how credit card processing works are settlement. By now, your customer’s money has moved from their bank to the acquiring bank. If you are processing with an ISO or aggregator, the acquiring bank is their sponsoring bank.
Your merchant account provider performs one final review of your batch before depositing the funds into your bank account. If they suspect any fraud or risks, they may hold these sales for further examination.
Typical funding times are two to three business days. However, each merchant account provider has a particular cut off time for when they need to receive your batch. Submitting batches after this cut off time can delay funding an extra day. Make sure to discuss this with your merchant account provider, so you get paid as quickly as possible.
If you are unsure of what your current merchant account providers cut off time is, feel free to send us a note in the Contact Me page, and we will let you know.
Conclusion
Today’s post was a very basic overview of how credit card processing works. Make sure you subscribe to our blog because we will share tips on how to save money very soon. Thanks for reading!