Ever wondered how credit cards work? Find out here

We simply swipe our credit cards in a Point of Sale (POS) machine and voila! Payment is done within a few seconds. Have you ever imagined how the system works to enable your plastic money do shopping?

Swiping is just the first step of a complex process that involves multiple parties. Here is a rundown of how the entire system works to enable your credit card make financial transactions.

How Credit Card Processing Works?

The entire process begins when the credit card holder either swipes or dips the card in the POS terminal. The process of payment can also be triggered through entering the card information in a payment gateway or digital wallet. The merchant then accepts the information through a two-way card present at the POS or through an online gateway.

After the information is collected, it is routed to the next stage of authentication. Here, card processor is the communication link between multiple parties present in the transaction. The information is now sent to the card network.

The card network ensures the payment request is securely passed to the issuing bank. Card details are then validated by the bank for the related account to check the availability of credit limit. Bank can also reject or approve or the transaction. The appropriate response is sent through the same processor and channel-card network.

After the approved message is show to the merchant, the transaction is considered as complete. The amount gets deducted from the user's account however, actual clearing of funds by bank to the merchant happens after some time or days; depending upon the card network.

MasterCard and Visa offer a faster clearing mechanism in comparison to American Express.

Processing Fees and Charges

Interchange Fee

Merchants need to pay a fraction of their income as fee that is shared by card network and bank. MasterCard and Visa have a fixed percentage per sale and a portion of it goes to the partner bank. The amount is minimal, however, multiple transactions can add up to a large amount. Interchange fees defers on the basis of payment type, business type, and card network among others.

Branded Card Usage Fee

When you use a branded credit card at a collaborated POS then the merchant is required to pay a fees over the interchange fees. It is also known as assessment fees and depends on business type, card type, and other factors. Branded cards are offered after negotiation of fees between the bank and merchant, the fees amount is non-negotiable.

Markup Fee

Processor and banks bear particular costs to enable credit card transactions. To cover those costs and profit margin, a markup fees is charged on every transaction. It varies on the basis of pricing model and processor.