What is Credit Card Processing and how does it work?

Credit card processing is the backbone of ecommerce. When a customer orders something from an online store, their credit card is processed in order to complete the sale. This process happens behind the scenes and is handled by a payment gateway.

A payment gateway is a service that enables businesses to accept payments online. It acts as an intermediary between the customer and the bank. It is responsible for securely transmitting sensitive information like credit card numbers, names, addresses, etc.

Payment gateways are vital to online businesses; they act as insurance policies that protect both customers and sellers in case of disputes or chargebacks. They also make the process of accepting payments simple by providing APIs (application programming interfaces) that can be plugged directly into shopping carts and other systems.

Credit card processing involves the following steps:

1. Authorization (Customer Action) : When a customer initiates an order, the payment gateway verifies whether there are sufficient funds in their account to complete the transaction. If there is enough money available, then it will indicate that the transaction is good to go. This step prevents a situation where a customer might accidentally initiate a transaction for more than they have in their account.

2. Capture (Seller Action) : When the order has been confirmed, the gateway captures the funds from the customer's account and sends them to your merchant account or bank account. This step takes up to a few days, and if for some reason the customer's bank declines the transaction, then this money is refunded back to their account.

3. Settlement (Seller Action) : After several days of processing, when the payment gateway has verified that funds have been successfully transferred to your bank account, it will "settle" the transaction. This means that the funds will be permanently transferred from your customer's account to your merchant account or bank account.

The entire process usually happens in a matter of seconds, but it can take up to a few days for the funds to be settled.

Author's Note

Now that you understand how credit card processing works, you can rest assured that your customers' information is being handled securely and that their money is being transferred in a timely manner. By using a payment gateway, you can focus on what you do best: running your business!