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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 go through.

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 transaction:

  1. The merchant figures out the amount of sale and requests payment from you.
  2. You give the merchant your credit card.
  3. The credit card is run through the “point of sale” unit
  4. The amount of the sale is either hand-entered or transmitted by the cash register.
  5. Merchant transmits the credit card data and sales amount with a request for authorization of the sale to the bank they use.
  6. 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.
  7. 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 bank.
    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.
  8. 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.
  9. 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.
  10. 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.
  11. 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.
  12. 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 bank account.

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