Website Credit Card Payment Processing – How Does It Happen?

Credit cards are used by all of us today to purchase items from e-commerce websites and brick-and-mortar retail shops. In spite of using cards almost every day, not many of us understand how credit card processing happens and the components that come into play in moving money from their account to the business’ account. In this piece, we explain the payment flow for internet transactions.

Types of transactions

Credit card processing includes numerous transactions. These are explained below:

• Preauth transactions: The validity of a card is verified during this transaction. The fee for running this transaction is typically around one dollar.
• Postauth transactions: In these transactions customers buy an item and the product is not shipped immediately. At the moment the order is confirmed, a card hold is applied on the customer’s card. The business owner runs a postauth to move the money after the order has been shipped. This also removes the hold placed earlier.
• Credit transaction: This is the transfer of monies from the merchant’s account to the purchaser’s. This is required when a merchant issues credit for returns etc.
• Sales transaction: Here the customer buys an item and makes a payment with the credit card – to shift funds from her own account to the merchant’s .
• Chargeback transaction: Chargebacks are instances where a buyer disclaims a charge to her card. In these situations, the bank recalls the sum under question from the merchant’s account and places it in the customer’s account till the time the dispute is sorted out. The merchant gets some time to establish their charge. If they can satisfy the bank with evidence , the amount is moved back to the merchant. Chargebacks proves costly to the business as banks levy a charge for the time and effort involved.

Necessary website infrastructure to support online credit card payments

You should have the infrastructure to manage credit card transactions on your business website. Some of these basic requirements are:

• a “card not present” merchant account
• an account with a gateway such as AuthorizeNet, CyberSource, WorldPay, etc.
• a “vital tear sheet” to submit to the gateway (provided by the bank)
• affiliation with credit card types such as American Express; to be sent to the gateway
• an SSL enabled server

How does the website credit card processing work?

Following is the breakdown of how it all happens:

1. The client places an order by filling up a form that collects the credit card particulars. On submitting the form, the information is transmitted to the server.
2. The information is processed by the server and routed to the appropriate application for credit card verification.
3. The function of the software is to verify the payment particulars entered by the buyer. If the information is validated, it sends the data to the gateway for more checks.
4. The gateway checks the validity of the card and if the funds are available or not. Depending on the response to these checks, it accepts or rejects the credit card and sends the message back to the software. This service comes at a fee that can be a flat monthly rate or a per transaction rate.
5. The gateway routes the transactions to selected clearinghouses (selected by the bank for specific types of credit cards) in batches.
6. The clearinghouse gathers transactions from many gateways, groups them into batches for different banks and moves money accordingly. Again, this service is charged a fee that can be anywhere from 2%-5% of the credit card sales.
7. The clearinghouse transmits funds between the banks – customer to merchant.
8. On receipt of the transaction, the merchant’s bank moves the dollars from the customer’s account to the merchant account. Here too, the bank or card issuing company will charge some fees for a range of associated services – setting up the merchant account, discount fee, monthly minimum fee, etc.

This article should give you some understanding of what goes on when you submit an online order form. As illustrated, credit card processing isn’t so baffling after all. Yet, owing to the multiple steps involved in the process, businesses are more comfortable paying a credit processing company to manage it. As payment processing rates have come down substantially in the last few years, this move also makes sense financially.

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