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How Merchant Accounts Work? |
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Whether you are new to credit card processing or you've been doing business with credit card holders for years, you may have never bothered to ask, "How does it all work?" Your customer has a credit card in hand, and you, the merchant, have a merchant account and payment processing system in place -
Now what?
You may think it's as simple as transferring money from their card to your account. You'll be surprised at the distance the transaction actually has to travel before it comes to rest in your own business bank account.
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| Here's how it works: |
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1. The customer presents their credit card to you for payment.
2. Whether you swipe it, enter the information manually, or process the card in real-time through your payment gateway, you use the merchant's credit card number to submit an electronic request to the processing network (this is who handles the merchant's side of the credit card transaction) for "authorization to capture funds" in the amount of the purchase from the cardholder's credit card account.
3. The processing network receives your electronic request almost immediately, and channels the transaction to the appropriate credit card company (i.e. Visa, MasterCard, etc.) The credit card company requests authorization from the bank that issued the card (i.e. Citibank, Bank One, MBNA, etc.), who will determines if the cardholder's account is valid and if the funds are available.
4. If they are, the Issuing Bank returns an approval code through the credit card company to the processing network. The processing network then forwards an electronic response, usually a six-digit number called an "authorization code", to your terminal or computer. This is your guaranteed authorization to capture the specified amount of funds. If the card is not valid, has been reported lost or stolen, or has insufficient funds, the transaction will be rejected, or "declined". The transaction and the corresponding authorization are stored in a "batch" along with the other transactions of the day.
5. Assuming the transaction has been approved, you print a receipt for the customer to sign using your terminal or computer, or send some other kind of electronic confirmation. As far as the customer can tell, the transaction has been completed. And although the transaction has already traveled a great distance in mere seconds, the money still has a ways to go before it lands in your account.
6. Now the day's batch of transactions needs to be submitted, or "settled", for a final capture of the funds. This typically takes place at the end of the business day, when a request to settle the batch is submitted by the merchant through the terminal or payment gateway (if you're lucky, it may be automatically requested by your payment gateway.) The processing network receives the request, determines whether the capture amounts in the batch match the authorizations for each item. If all matches up, the request is approved and an "accepted" response is sent to your terminal or computer. Individual transactions are again directed to the appropriate credit card companies, and then to the Issuing Banks for posting to the cardholder's accounts. Settlement reports can be printed to show the totals of your transactions.
7. The batch funds will then be electronically deposited into your business bank account, generally within 48 to 72 hours. The discount rate charged by your merchant account provider will usually be deducted from the deposit before your "net deposit" is transferred to your account.
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Quite a distance to travel for one little credit card transaction, isn't it?
Aren't you grateful you didn't have to do all that running around yourself?
It's a complex system, but in the end it makes the life of the merchant, and the customer, a lot easier. |
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