The term credit card processing means the processing of transactions made by customers with their credit cards. Retailers (online and offline) use the service to allow customers to make purchases, in most cases with an option to pay in installments or with no payment at all in some occasions.
The merchant uses a payment gateway which processes payments when one of these cards is swiped. The service providers use a payment processor for this service. The details of the transaction are converted to an encrypted value and transferred over the Internet to be processed and verified by this network and then finally given back to the retailer (the store).
There is no easy answer that how it works because there are many components involved in the process. To make it easier to understand, I have jumbled up all the components into 4 main categories:
1) Merchant's Point of Sale System (POS):- The first component that is used by a merchant to accept credit card payments at their point of sale systems. This includes hardware devices like electronic cash registers, scanners and other related equipment's.
These devices are used to accept payments by swiping the customer's credit card thru the swipe machines, credit card processing the input and then validating it with a payment gateway. The hardware connects to computer systems that allow merchants to perform administrative functions like maintaining inventory, calculating commissions and track sales history.
2) Merchant's Point of Sale Software:- The software that runs on merchant's computers is used to run the business and record sales. This POS (point of sale) software can operate as a stand-alone application or it can be integrated into the general ledger of the business which also keeps track of all financial transactions. They usually support multiple outlets and may allow for different pricing structures depending on your business model.
3) Payment Gateway:- The payment gateway is a secure transaction computer that provides a secure link between the merchant's POS and payment processors. It accepts input from a swiped card, checks its validity and then authorise the transaction.
The rules for accepting or denying transactions are set up by the payment processor to protect against fraud. All payment gateways are PCI-DSS compliant by default which requires that they use strong cryptographic methods to protect the transactions.
4) Payment Processor:- These are third party companies who enable merchants to accept credit card payments for a fee (usually 1.5% to 3%). They provide support, software and other services required by a business.
The merchant account also allows the business to accept and process payments and maintain a reserve balance for each payment, which can be used to settle future transactions that may not have cleared in time. This will happen because credit card transactions take time (3 to 5 days) to clear and confirm before the funds are settled.
At last we cannot say that how it works because it is a big system with many different components and all these components work together to complete one single function and that is to allow your customers to pay you with their credit cards.
