In this digital era, it has become absolutely imperative for businesses to accept credit and debit card payments. The modern consumer demands a high level of convenience. That means they are less likely to be carrying cash around with them. Whether they are making an in-store purchase, an over-the-phone purchase, using an online store, or ordering via mail order or email, consumers will typically seek to pay through their credit or debit cards. To support card payments, businesses need to choose a reliable credit card processing company. Before you make their choice, understanding the basics of what credit card processing is (and how it works) is essential. 

Understanding credit card processing.

Credit card processing happens in a matter of just seconds as a point of sale (POS) terminal reads your customer’s card information and sends it to a processing company such as North American Bancard, who ferries it to the cardholder’s bank. The cardholder’s bank then approves (or declines) the transaction, sending the data back to the processor and ultimately, to your POS system. Amazingly, the transfer of data between these three points takes only a few seconds to be completed. 

Entities involved in processing credit cards. 

For a transaction to be processed, it needs a cardholder, a merchant, a payment processor, an issuing bank, and the card associations. A cardholder obtains a credit card from an issuing bank through the card associations. The credit card associations include American Express, Visa, Mastercard, and Discover. The responsibilities of card associations include governing the members of the association, maintaining card networks and interchange fees, and acting as an arbiter between banks. 

How does credit card processing work?

There are three main steps involved with credit card processing. They are authorization, settlement, and funding. 


The first step of the process is an authorization. A cardholder pays you for goods or services by using a credit card. You accept a card through a credit card terminal or POS terminal, which forwards a request for the authorization of the payment to their payment processor. 

Once a payment processor receives the request, it encrypts and sends the data to the appropriate card association, who forwards the request to the bank that issued the merchant’s card. The authorization is done by the issuing bank on the basis of CVV, expiration date, and AVS validation. It is up to the issuing bank (and the issuing bank only) to approve or decline the transaction. A transaction is declined when the limit of the card has been reached, there are insufficient funds in the account, or if the account has expired. 

Whether the transaction is approved or declined, the issuing bank sends the information back to the card association, to the credit card processor, and to you, the business owner. 

Settlement and funding.

Next comes settlement and funding, which takes place after a payment has been authorized. Once you receive an authorization, the information is forwarded to your payment processor. The transaction details are then sent to the card association, who communicates the appropriate debit amount to the issuing bank. The issuing bank transfers the required funds to the merchant bank after deducting their interchange fees. The merchant bank then transfers the funds to your merchant account. 

These are the stages of credit card processing. By understanding the process, you can make a more informed decision when choosing which payments technology company to partner with.

Contact NAB today and see how easy it is to get the merchant services you deserve.

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