The process of a credit card transaction can be broken down into several steps, including cardholder initiation, card authorization, cardholder account validation, and transaction processing.
- Cardholder initiation: The process begins when the cardholder initiates the transaction by presenting their credit card to the merchant. This can be done in person, online, or by phone. The cardholder may also need to provide a signature or personal identification number (PIN) to verify their identity.
- Card authorization: Once the cardholder's information is entered into the merchant's system, the merchant sends a request for authorization to the card issuer. This request includes the cardholder's account information, the amount of the transaction, and the merchant's identification number. The card issuer then checks the cardholder's account to ensure that there are sufficient funds to cover the transaction and that the account is in good standing.
- Cardholder account validation: If the card issuer approves the transaction, it sends an authorization response back to the merchant. The authorization response includes a unique authorization code, which the merchant records for future reference. The merchant also verifies that the authorization code matches the one on the cardholder's receipt.
- Transaction processing: Once the transaction is authorized, the merchant captures the transaction, which means they submit the final transaction amount to the card issuer for settlement. The card issuer then updates the cardholder's account to reflect the new balance and sends a settlement response back to the merchant. The merchant records the settlement response and provides the cardholder with a receipt for the transaction.
- Clearing and Settlement: After the transaction is captured, it goes through a clearing and settlement process. During clearing, the card issuer and merchant's acquiring bank exchange information about the transaction and reconcile their records. After clearing, the acquiring bank settles the transaction with the card issuer, transferring funds from the card issuer to the merchant.
- Billing and Payment: Finally, the card issuer will bill the cardholder for the transaction and the cardholder will have to make a payment to the card issuer to clear their outstanding balance.
Overall, this process can take just a few seconds to complete, allowing cardholders to make purchases quickly and easily. However, it is important to note that this process is highly secure and includes multiple layers of protection to prevent fraud and unauthorized transactions.