Understanding How Merchant Bank Credit Card Processing Works

Whether you are a credit card user or a business owner interested in accepting credit card payments, it is a good idea to understand how merchant bank credit card purchases are processed.

There are several parties involved in each credit card transaction:
The customer, or cardholder making the purchase
The issuing bank, or the company that issues Visa or MasterCard credit cards to customers
The merchant, or business accepting credit card payments
The sponsoring bank that handles the card transactions on behalf of the merchant
Several important steps take place within a matter of seconds that allow these credit card transactions to be so effective and convenient.

Step 1 - Authorization

Whether making an online or in-store credit card payment, when the card is swiped or the card numbers are entered, the card account information is sent instantaneously to the sponsoring bank for authorization. The sponsoring bank then sends the card number, expiration date, billing address, the card verification value (CVV), and the purchase amount to the issuing bank.

Step 2 – Verification

The issuing bank then checks to make sure all the information received matches the data it has on file for the cardholder. It also verifies that the cardholder has enough available credit to cover the purchase. Some card services will also check to make sure the requested purchase is not outside the cardholder’s usual spending habits, especially if the purchase is made outside of the country or if it is for something that the issuing bank classifies as at high risk for fraud.
If the purchase is approved, the purchase amount is subtracted from the cardholder’s available credit limit.

Step 3 – Approval or Denial

The issuing bank responds to the sponsoring bank with either an approval or denial of the purchase. If denied, the cardholder is asked to use another form of payment. If approved, the cardholder is given a confirmation of payment. The issuing bank then transfers money to the sponsoring bank to pay the merchant. The sponsoring bank sets aside these funds in a “batch” with other authorized payments.

Step 4 – Final Payment

At the end of day, typically, the business owner will send a request to the sponsoring bank for payment of the day’s transactions. The bank then transfers the Net Settlement Amount, or the money transacted minus the bank’s handling fees, into the merchant’s own personal bank account.

These transactions operate amazingly well each day, allowing customers an easy way to finance their purchases. Merchant bank credit card accounts are a lightning fast way to conduct business while providing great convenience to cardholders and merchants alike.