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How merchant account transactions work

Interactive guide to merchant account processing

If your business accepts -- or wants to accept -- credit cards, you have to learn the merchant account process. Use this interactive graphic to learn how it works when you or your customer swipes a card.

How merchant accounts work

A merchant account allows merchants to accept credit cards. It is an agreement between your business and a bank or third-party provider that outlines your rights and duties in accepting plastic. Every merchant account charges fees. Some are charged per transaction and others periodic. Fees will vary depending on the type of account you have, who you get the service from and what type of cards you accept. Due to this variance, this graphic uses typical examples to produce a generic reproduction of the merchant account process. Click through the tabs to learn how merchant accounts work. Click on the animated tab to see the process graphically; click on the list tab to read the process in chronological order, and click on the glossary tab to learn about terms used in this interactive.

Authorization

Step 1 A cardholder requests a purchase and submits a card to you.

Step 2You communicate the card data, which includes the card number, expiration date and security code, to your merchant account provider with either a credit card terminal, a point-of-sale system or a payment gateway if you’re an online merchant.

Step 3 Your merchant account provider communicates the card data to your acquiring bank. If your acquiring bank is your merchant account provider, this step is skipped.

Step 4 The acquirer sends the data through the card network, which then asks the issuing bank if sufficient funds are available. If so, the transaction is authorized and the money is placed on hold, or pending, in the cardholder’s account.

Step 5 The issuing bank tells the card network whether the transaction was authorized and sends it an authorization if everything clears.

Step 6 The card network relays that information to your acquirer or merchant account provider.

Step 7 You get the results back in the form of an authorization code and exchange goods or services with the cardholder.

Settlement

Step 1At the end of the day, you send all the day's card-based sales, called a batch, to the merchant account provider. If you’re using a payment gateway, batching is generally done automatically. If you’re using a POS system or dial-up terminal, you might have to initiate this process.

Step 2 The merchant account provider then sends the batch to the acquirer, which forwards it the card network. If your acquirer is your merchant account provider, the batch is sent directly to the card network.

Step 3 The card network sends the batch to the cardholders’ issuing banks, which checks the authorization codes of the sales in the batch.

Step 4 The issuing banks then subtract interchange fees and shares them with the card network. Then the banks add the original amount to the cardholders' bills and transfer the money, minus fees, to the acquirer or your merchant account provider.

Step 5 The acquirer subtracts its discount fees and the merchant account provider subtracts its fees, which can include pretransaction fees and discount rates.

Step 6 The merchant account provider deposits the remaining money into your business checking account.

Glossary

Acquirer: A bank that processes and settles a merchant's credit card transactions with the help of a card issuer.

Authorization: A process that ensures the cardholder has sufficient funds available to cover the transaction they requested.

Batch: A collection of credit card transactions stored on a merchant's processing equipment. Usually, they are sent together for processing right before a store closes.

Cardholder: The owner of a card that is used to make credit card purchases.

Card network: Visa, MasterCard or other networks that act as an intermediary between an acquirer and an issuer to authorize credit card transactions.

Discount fee: A processing fee paid by merchants to acquirers to cover the cost of processing credit cards.

Interchange fee: A charge paid by merchants to a credit card issuer and a card network as a fee for accepting credit cards. They generally range from 1 to 3 percent.

Issuer: An financial institution, bank, credit union or company that issues or helps issue cards to cardholders.

Merchant account: An agreement between a bank or third-party provider and a business that allows the merchant to accept credit and debit cards.

Merchant account provider: A bank or other institution that provides merchant accounts to businesses that want to accept card-based payments.

Payment gateway: A service used by merchants that accept credit cards online. Usually a combination of hardware and software, the service uses encryption to securely send credit card data to a merchant account provider.

 

Updated: April 8,2020

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