How Does A Credit Card Work?

March 13, 2023 | Merchants | Dustin

For over seventy years, many have asked the question, how do credit cards work? Invented in 1950, credit cards have changed the landscape of commerce throughout their long evolution. Now, they are used in over 25% of all transactions. The convenience they provide for pay-later purchasing and online shopping has made for an entirely new way of processing payments. 

There are many stages credit cards travel through after you make your purchase. They are similar for both card present and card not present transactions. This process breaks down into four major stages – Authorization, Batching, Clearing, and Funding. 

Stage 1: Authorization

The first stage a credit card makes is authorization. This happens in a matter of seconds right after purchase. After you swipe, your information is sent to your merchant account provider. They request authorization from the card issuer. This validates the information on your card to show that the card is active and available for use. There are two other entities involved in this step. The request is also logged through a merchant account. 

Once the issuer approves the transaction, the merchant can accept your payment. This stage confirms that your card has enough credit available to complete the purchase. 

Stage 2: Batching

Every day, thousands of payments flow through various transaction channels. This is why many e-commerce merchants choose to submit their payments in a batch. It’s beneficial to a merchant because they get charged per transaction. The concept extends to the financial practice called microtransactions. These are small payments that can be as little as a few cents. These are batched together and submitted as a singular grouped payment. Some companies choose to submit all of their payments at the end of the day in a batch. The processor sorts these payments then they’re sent to the acquiring bank.

Stage 3: Clearing 

Halfway through the payment journey is the clearing process. At this point the transaction went to the processor, then acquirer; next it will go to the card networks. These include more highly recognized names like Visa and MasterCard. The card networks source their information from what’s called an issuing bank. 

The issuer charges the account of the person making the purchase. Then, this charge is confirmed and routed back through the payment processing channels. After receiving the request from the issuing bank, the card network sends it to the acquiring bank.

Stage 4: Funding

The final stage of the credit card transaction journey is funding. The acquiring bank places the dollar value for the amount purchased into the merchant’s account. At that point, the merchant can see and verify the funds arrived and the payment is complete.