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How Does Credit Card Processing Work?

Have you ever wondered how credit card processing works?

Credit Card Processing is how you obtain a Merchant Account. If you’re a business (retailer, services business, e-commerce business, etc.) and you want to accept credit cards on a website or in your retail store, what exactly is involved? Although it all happens in the blink of an eye, credit card processing is not a simple process – there are actually a lot of steps involved.

There are four main entities involved in every credit card transaction. There’s the customer, the merchant, the issuing bank that issued the credit card, and the acquiring bank that will be accepting the credit card payment. If you are a merchant who can accept credit cards, the transaction begins when the cardholder requests a purchase. The merchant (that’s you) receives that request and then submits it to the acquiring bank. The acquiring bank then contacts the issuing bank to check that there is credit available. If there is, then the acquiring bank authorizes the transaction and the purchase goes through.

If you’re a merchant who accepts credit cards on a website, then there are actually additional steps involved. The customer starts by filling up their online shopping cart with the items you sell and then they place their order. Then something called an internet payment gateway sends encrypted credit card information to a payment processor. The payment processor contacts the customer’s bank with the request and sends back the authorization if the credit card is approved. Those are the bare bones basics of how credit card processing works.

In order for a bank to allow you to accept credit card payments, you need to have a merchant account. Why can’t just any old bank account accept credit card payments? Well when banks agree to allow you to accept credit card payments, they see that they are taking on some risk as giving you a merchant account is the same as giving you a loan. Although they disperse the money to your account within a few days after the transaction occurs, they still run the risk of dealing with a chargeback or you as the merchant committing fraud. After the person receives the product if they want to return it – or if they never actually received it in the first place – there may be a chargeback. Or, if the credit card was used fraudulently, there might be a chargeback. In either case, the bank will have already dispersed the money to you. Usually that means that they will want to make sure that your personal credit, business credit history, and criminal background check are all clean so that they don’t have to worry about getting the money back from you in the event of a chargeback. For the same reason, they’ll also want to give merchant accounts to businesses that are not likely to go bankrupt.

Banks will also most likely avoid giving merchant accounts to businesses that they consider high risk. High risk businesses include online video games, network marketing, technical support, and annual subscription processing. Products that are sold via infomercials are also considered high risk. If you’re in a high risk industry though, you can still get a merchant services account. All that you have to do is find a merchant services consultant like Rapid Financial Solutions and if you have all the proper paperwork and are running a professional business, you’ll be able to open a merchant account and accept credit cards just like any other business.

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