Business finance hub > Credit Card Payment Processing Guide – What It Is, How It Works, & How to Choose a Processor
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Credit Card Payment Processing Guide - What It Is, How It Works, & How to Choose a Processor
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Credit Card Payment Processing Guide - What It Is, How It Works, & How to Choose a Processor
In 2020, more than 188 billion purchases were made using a Visa credit card as the means of payment. And as more and more people make more and more purchases from the safety of their computers, credit cards become a more common payment method. It’s fast, convenient, and provides business owners the ability to better manage their cash flows. But when we use a credit card to make a purchase, we rarely think about what exactly happens. Specifically, how are our credit card payments processed? And more so: what is credit card processing?
By educating yourself on some of the intricacies of credit card processing, you can understand why it’s important for businesses of all sizes. More than knowing its general importance, you can also learn which credit card processing company might be best for you.
We’ve created this introductory guide to help clear up some of the complexities of credit card processing. In this guide you’ll find a clear definition of just what credit card processing is, what the process of credit card processing is (and what financial institutions are involved in it), why a business would use credit card payment and how to choose the credit card processor for you.
To begin, let’s talk about exactly what credit card processing is.
What is credit card processing?
Credit card processing is the series of necessary steps that occur when a credit card payment for business is made. This multi-step process goes into effect when a credit payment is made–in person, online, via your phone, etc. Later in the article we’ll break down the process step-by-step, but to start we wanted to identify the crucial participants that make processing a credit card for a business or a credit card payment for a small business possible.
Who is involved in making credit card processing possible?
The customer
The person or business making a payment using a credit card is the kick-off point for any sort of credit card processing.
The merchant
The other half of the purchasing process, a merchant has the desire goods or service that a customer uses a credit card to pay for.
Payment gateway
When a payment is made, it goes through a payment gateway that connects the merchant to the credit card processing company. A payment gateway deals with all of the customer and the merchants financial information, the present or not-present state of the credit card, (i.e. is the payment virtual or in person), and sends them to whatever credit card payment system for small business the merchant is using. Payment gateways will then inform the merchant if the card has been approved or declined. There are many credit card payment systems for small business that we’ll walk you through later on in this article.
Payment processor
This is the virtual liaison between the merchant’s preferred credit card and the customer (or cardholder’s) financial institution of choice. When you make a credit card payment for business, the payment processor helps the two institutions communicate.
Card network
The customer makes a credit card payment using a specific credit card brand–Visa, Mastercard, Discover, etc. This brand of credit card is commonly referred to as the “card network.” Customers choose their card networks based on a variety of factors: rewards, APR, interest rates, initial signing bonuses, etc.
Issuing bank
You can think of this as the “customer’s bank”. When a credit payment for business is made the payment processor works with the issuing bank to provide payment to the merchant. They also will ensure that the customer has the available funds to make the purchase, and if so, they’ll approve the release of those funds.
Acquiring bank
This is the merchant’s bank. When a payment is made–via credit card or otherwise–this is where it ends up and where it’s stored for future use. Many banks also act as credit card processors, providing their own credit cards and/or the equipment used to allow businesses to accept credit cards. Nowadays, many of these credit card payment systems for small business (or big business) exist as strictly online entities.
With a clearer picture of just what credit card processing is and who the major players are in credit card payment processing for small business, let’s break down how it works step-by-step.