Credit card processing is the business of simultaneously authorizing and capturing a payment between a company and its customer. The authorization process verifies that there are sufficient funds in the customer’s account to complete the transaction, while the capture process instructs the merchant bank to transfer funds from the customer’s account for a specific purchase.
At first glance, the process of accepting credit card payments may seem simple, but there is more to it than meets the eye. Merchants need to work with payment processors in order to complete transactions between their customers and themselves. However, some merchants struggle because they don’t understand what goes on behind the scenes when it comes to processing credit cards.
There are several steps involved in completing a credit card transaction, which include authorization and settlement. In this blog post, we will go over the two processes that make up the world of credit card processing—and help you better understand how it all works.
The first step of the process is to authorize a payment. During this stage, a customer must input their credit card information into a point-of-sale (POS) terminal or online payment gateway system. The transaction is then sent to the merchant’s bank as an authorization request for a certain dollar amount.
In order to complete this step, merchants must utilize a third party processor so they can accept debit and credit cards. This third party processor will receive the payment request, verify that funds are available in the customer’s account, and determine if the card was listed as stolen or lost. Once all of these steps have been completed, customers are given a unique transaction code to indicate how much money is being authorized for the purchase.
The merchant then has a specific amount of time to complete the transaction before the authorization expires. If they fail to do so, the funds for this purchase will be returned back to the customer’s account and their merchant account will be negatively affected.
If merchants are able to approve an authorization request, they must then approve a capture request in order to process payment for that customer. This is when merchants actually take possession of the funds for a transaction and transfer them from their customer’s account to their business’ bank account.
In order to confirm that a capture request is valid, merchants must input a specific amount of information such as date, time, and identification number (which will be provided by their payment processor). Before this step is done, merchants are not allowed to cancel the transaction.
Here’s an example of how it all works: Let’s say a customer goes to Starbucks, uses their card to pay for their drink, and enters the appropriate PIN. This would be considered an authorization request because they are verifying that there are sufficient funds in the customer’s account to complete the transaction. The cashier will then swipe their card through a POS terminal and capture the payment for that purchase.
The funds would then be transferred from the customer’s bank account to Starbucks’ bank account, while the original authorization request is voided in favor of this new transaction. If there were insufficient funds in the customer’s account, the transaction would be declined and they would not be allowed to purchase their beverage.