How Do Credit Card Transactions Work?

The payment processing industry is very confusing that most Business Owners don’t understand how a credit card transaction works, who’s involved and how does the money flow when a Customer purchases a product or service at their Business.

Let’s define as simply as possible the main parties that are involved during a transaction where a Customer pays for a product or service from a Business:

Customer= the Credit Card Holder, or the Customer of the company that issued that specific credit card.  Also is the Customer of the Business where the credit card purchase is made.

Merchant= the Business Owner that is providing products or services to Customers.

Card Issuer= the company that backs the credit card and issues it to a Customer.

Card Acquirer= the company that is connected to the Merchant, the Card Company and the Card Issuers of the Customers.  Card Acquirers are also called Credit Card Processors or Payment Processors.  Point of Sale companies will not be discussed here for simplicity.

Card Company= Visa and Mastercard (see links for interchange rates)

Let’s define as simply as possible how the money flows during a transaction where a Customer pays for a product or service from a Business:

Customer= pays with a credit card issued to them by Card Issuer, then walks off with the product or service offered by the Merchant.  Customer also pays fees and balances owed to Card Issuer.

Merchant= pays a Merchant Discount Rate (interchange rate plus gross profit of Card Acquirer) and fees to his Card Acquirer for the transaction, and then receives payment for the Customer’s purchase 1-2 business days later from the Merchant’s Card Acquirer.  Card Acquirer is essentially extending credit for the Customer’s credit card purchase to the Merchant.  Card Acquirer then gets money for the purchase from Card Issuer.

Card Acquirer= pays fees to Visa or Mastercard in general, and for this particular transaction, interchange fees (Merchant Discount Rate- Interchange Rate= Difference or Gross Profit to Card Acquirer) to the Card Issuer that issued the credit card that the Customer used for that purchase.  We are just talking fees here, not the actual money for the Customer’s purchase.

Card Issuer= pays transaction fees to Visa or Mastercard for this particular transaction.  And collects money and fees from the Credit Card Holder/ Customer for extending credit to them.

US

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