This topic overview provides credit card merchants with a common understanding of the key players involved in credit or debit card transactions, the life cycle of a transaction and common transaction types.

To better understand the process of a credit or debit card transaction, it is necessary to learn the key players involved.

  • Cardholder: Non-consumer or consumer customer to whom a payment card is issued or any individual authorized to use the payment card
  • Merchant: Any business that maintains a merchant account that enables them to accept credit or debit cards as payment from customers (cardholders) for goods or services
  • Acquirer: Also referred to as “acquiring bank” or “merchant’s bank,” acquirers contract with merchants to create and maintain merchant accounts that allow the business to accept credit and debit cards; provide merchants with equipment to accept cards and manage customer service and other necessary aspects involved in card acceptance; deposits funds from card sales into a merchant’s account
  • Processor: Sometimes referred to as “payment gateway” or “payment service provider (PSP)”; entity engaged by acquirers to handle credit and debit card transactions on their behalf 
  • Issuer: Also referred to as “issuing bank” or “cardholder’s bank”; entity that issues credit or debit cards to consumers and pays acquiring banks purchases that their cardholders make; it is the cardholder’s responsibility to repay their issuing bank under their credit card agreement
  • Card Network: Entity that controls where credit or debit cards can be accepted and facilitates transactions between acquirers and issuers; four major card networks include Visa, Mastercard, Discover and American Express; Card networks are not banks, and they do not issue credit cards or merchant accounts

Credit or debit card transactions are processed through a variety of platforms used by a merchant, including point of sale terminals, eCommerce and telephone or mail. The entire processing life cycle from the time the card is dipped/swiped/tapped/keyed until a receipt is produced takes place within 2 to 3 seconds. There are two stages in the transaction process.

 An image of credit/debit card transaction life cycle - Stage 1: Authorization and Authentication

In the authorization and authentication stage, the merchant must obtain payment approval from the issuer.

  1. Cardholder: The cardholder pays the merchant for a purchase with a credit or debit card. 
  2. Merchant: The merchant uses its credit card machine, software or gateway to transmit the card’s detailed information to the acquirer (or its processor). 
  3. Acquirer: The acquirer (or its processor) forwards the card’s detailed information to the appropriate card network. 
  4. Card Network: The appropriate card network requests payment authorization from the issuer. The authorization request includes card number, card expiration date, billing address,card security code and payment amount.
  5. Issuer: The issuer validates cardholder account, approves or declines the transaction and places a hold for purchase amount on the cardholder’s account. 
  6. Card Network: The issuer sends back the appropriate authorization response through the appropriate card network to the acquirer (or its processor).
  7. Acquirer: The acquirer (or its processor) forwards the authorization response to the merchant’s terminal, software or gateway.
  8. Merchant: The merchant receives authorization response and provides the cardholder a receipt to complete the sale if it is approved. All authorized transactions are stored in a batch file awaiting settlement.
An image of credit/debit card transaction life cycle - Stage 2: Clearing and Settlement

The clearing and settlement occurs after the authorization process takes place.

  1. Merchant: At the end of each business day, the merchant sends approved authorizations in a batch to its acquirer (or processor).
  2. Acquirer: The acquirer (or processor) routes the batch information to the card network for settlement.
  3. Card Network: The card network forwards each approved transaction to the appropriate issuer. 
  4. Issuer: The issuer transfers the funds through the Card Network less interchange fees. 
  5. Card Network: The card network pays the acquirer (or processor) its percentage of the remaining funds.
  6. Acquirer: The acquirer deposits the funds from sales into the merchant’s bank account via automated clearinghouse (ACH) and debits the merchant’s account for processing fees either monthly or daily.
  7. Issuer: The issuing bank posts transactions to the cardholder’s account. The cardholder receives the statement and pays the bill. 
     

Decline

A credit or debit card decline occurs when the payment cannot be processed for a particular reason. The transaction can be declined by the payment gateway, the acquirer (or its processor) or most commonly the issuer. For more information, review the Resource: Credit and Debit Card Decline.

Chargeback

A chargeback occurs when a cardholder disputes a certain charge posted to their account.  It is usually a result of criminal fraud or friendly fraud, but may also occur due to merchant errors. For more information, refer to Resource: Credit and Debit Card Chargeback.

Refund

Refund methods are available for merchants that would like to refund a transaction previously processed in-person point of sale or online. Merchants should obtain the supervisor’s approval to authorize the refund. For more information, refer to Topic Overview: Credit and Debit Card Refund.

Questions?

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