How Merchant Accounts Work

Have you ever wondered how a business receives money when you pay by credit card?  If you're a business considering signing up for a merchant account, it's important to understand the process by which the cards are actually charged and how the money ends up in your business account as payment for goods or services.  Regardless of whether you sell items from a physical location or you operate your business solely online- the process of charging a credit card follows the same action.

While the actual processing of a credit card transaction occurs in just a few seconds, the path the information takes to get from the customer holding the credit card to the final result of withdrawing money from their account and depositing it into the business owner's account is quite complicated!  The behind-the-scenes work is quite extensive, and may surprise you!

How Credit Cards are Charged

• When a customer has decided what they want to purchase, they either head to the cashier with their items or place them in their virtual shopping cards on web site retailers. 
• As the method of payment, the customer selects "credit card".  If the customer is shopping in a store or at a restaurant, for example, the card is actually swiped and read electronically for customer information and the account number.  If the customer is shopping online, the customer will be taken to a form on a secure web server that requires the customer to enter details such as the credit card type, the number, expiration date, and the name of the card holder.
• The credit card transaction information is tested for authorization by the card terminal software at a retail store, or by the software in an online environment, with the information moving from the server or store to the processing bank using SSL encryption.
• The business website or terminal equipment will make a connection to the third party that handles the connection to the merchant's processing bank.  (online, the software that handles this is called the payment gateway).
• The payment processor will check the validity of the card by communicating with Visa, MasterCard or Discover- and will confirm whether or not the funds are available in the account to make the particular purchase the customer is attempting to make using the credit card.
• If the transaction is approved by the account holder's bank, then an authorization approval code is sent in an encrypted form to the card processor and the customer receives a "payment confirmation" notice on the card swipe terminal or web page.
• The amount of the purchase is then moved from the cardholder's bank (the issuing  bank of the particular credit card being used in the purchase) to the business owner's processing bank.  The processing bank will physically move the money from their account into the business owner's local bank account in about 3 business days. 

 So while it only takes a matter of seconds to swipe a card at the store, or receive confirmation (or denial) from an online transaction, the behind-the-scenes process is complicated and requires many steps to fulfill each credit card purchase.