How Credit Card Transactions Work
What’s occurring what is occurring
during a credit card transaction
When you use your credit card to buy something
it puts an entire network into motion. You promise
the credit card company that you will pay them
back the amount used. A record of the card details
and the purchase details indicating the amount
to be paid is kept by both merchant and card company.
Electronic verification systems verify that
the card is valid and that you have sufficient
credit to cover the purchase. This happens in
just a few seconds so that the transaction can
Then every month you get a bill from the credit
card company showing you what you spent that month
and the total amount owed. You must then pay the
credit card company back for the money you used.
The credit card company will charge interest on
the amount used to defray costs.
Steps involved in a normal credit card
- The merchant figures out the amount of sale
and requests payment from you.
- You give the merchant your credit card.
- The credit card is run through the “point
of sale” unit
- The amount of the sale is either hand-entered
or transmitted by the cash register.
- Merchant transmits the credit card data and
sales amount with a request for authorization
of the sale to the bank they use.
- This bank processes the transaction, routes
the authorization request to the card-issuing
bank. The credit card number identifies type
of card, issuing bank, and the account number.
- If you have enough credit in your account
to cover the sale, the issuing bank authorizes
the transaction and generates an authorization
code. This code is sent back to the acquiring
The issuing bank puts a hold on the account
for the amount of the sale. Note that the account
has not been actually charged yet.
- The acquiring bank processes the transaction,
and then sends the approval or denial code to
the merchant's point of sale unit. Each point
of sale device has a separate terminal ID for
credit card processors to be able to route data
back to that particular unit.
- A sale draft, or slip, is printed out by
the point of sale unit or cash register. The
merchant asks you to sign the sale draft, which
obligates you to reimburse the card-issuing
bank for the amount of the sale.
- Later, probably that night when the store
is closing up, the merchant reviews all the
authorizations stored in the point of sale unit
against the signed sales drafts. When all the
credit card authorizations have been verified
to match the actual sales drafts, the merchant
will capture, or transmit, the data on each
authorized credit card transaction to the acquiring
bank for deposit. This is in lieu of depositing
the actual signed paper drafts with the bank.
- The acquiring bank performs what is called
an interchange for each sales draft, with the
appropriate card-issuing bank. The card-issuing
bank transfers the amount of the sales draft,
minus an interchange fee to the acquiring bank.
- The acquiring bank then deposits the amount
of the all the sales drafts submitted by the
merchant, less a discount fee, into the merchant's