Understanding Credit Card Transactions
Who Are the Major Players in the Credit Card Transaction Cycle?
There are several people involved in credit card transactions. Their involvement ranges from facilitating purchases to filing chargebacks. It is important for business owners to understand the entire process and everyone involved to better prevent chargebacks.
Chargeback are the reversal of credit card transactions to a cardholder’s account from his issuing bank. When a consumer requests a refund from his or her issuing bank or credit union, as opposed to the merchant involved in the problematic transaction, a chargeback dispute claim is filed.
When a chargeback is initiated, the money is immediately lent to the cardholder from the card provider as they attempt to validate the dispute. If the chargeback is valid and the money is awarded to the cardholder, the keep the money that was lent to them. However, if the chargeback is proven false and the merchant wins the dispute, the issuing bank retrieves the money that was initially lent to the cardholder at the beginning of the process, it is returned to the merchant’s account, and the cardholder does not receive a refund.
Although the chargeback process may seem simple in theory, there are quite a few key institutions that play major roles throughout the cycle. In order to fully understand our own roles in the chargeback cycle, we must first understand a number of key terms. The simplest of these terms is the tool used to conduct the transaction in the first place: the credit card.
Credit Cards: The Transaction Essential
Credit cards are handheld plastic cards—issued to customers by issuing banks—that contain a magnetic strip which allows users access to money belonging to the issuing bank. Credit cards enable cardholders to obtain advanced funds based on their credit scores up to a specified credit limit. The funds borrowed using the credit card obtain interest until they are paid back by the cardholder.
The cardholder does exactly as you might think: purchases goods or services through credit card transactions. Cardholders are also often referred to as consumers or customers in eCommerce transactions; the ones who provide merchants with payment in exchange for their product.
Cardholders approved to receive a line of credit from an issuing bank then use the issued credit card to make purchases and are required to pay a monthly bill to repay their debts. If the balance on the cardholder’s account is not paid off with the monthly payment, interest is incurred which must also be paid by the cardholder. Users of credit, debit, charge and prepaid cards are all known as cardholders.
The merchant is the company or individual through which a cardholder receives a product or service in exchange for funds.
Card-not-present and eCommerce merchants accept payment card payments even when the customer is not physically there. Card-not-present transactions are conducted using credit or debit card information entered electronically into a gateway when the cardholder makes a purchase remotely. Online shopping, mobile payments, telephone ordering, mail order requests, and faxed orders all qualify as card-not-present transactions.
Brick and mortar stores and businesses use card-present technology to allow the cardholder to physically swipe the card, enabling the point of sale terminal to access the card’s details.
Although all merchants perform with the risk of chargebacks, the threat for card-not-present merchants is higher than it is for card-present businesses. The most common types of chargebacks are perpetrated against ecommerce merchants.
The issuing bank is the link between the customer and any credit card transactions. The issuing bank issues credit and debit cards to customers, providing them with a line of credit or access to their personal accounts. When the customer then uses his card in a transaction, the issuing bank provides the funds accessed to the acquiring bank, who then forwards them to the merchant. While the issuing bank distributes cards to customers, they depend on the acquiring bank for their relationship with merchants.
As a credit card holder, your issuing bank is the bank through which you receive credit statements each month and to whom you pay your monthly bill. As a debit card holder, your issuing bank is the bank through which you access your funds, as well as deposit pay checks, complete transfers, and use the ATM.
The acquiring bank is the link between the merchant and the issuing bank in a transaction. Holding a relationship with card networks such as Visa, MasterCard, Discover, and American Express, the acquirer provides lines of credit to the merchants and accepts transactions from issuing banks. This allows customers to use credit and debit cards to make purchases for goods and services from a merchant.
When a customer performs a credit card transaction, the acquiring bank receives this information from the merchant and through a payment processor, sends and receives information about the transaction to the card network and issuing bank. If the transaction is approved by both the card network and the issuing bank, the cardholder’s funds are sent from the issuing bank to the acquiring bank for the merchant to access them.
The Card Networks
Card networks, also known as card associations, are the recognizable name brands often associated with credit and debit cards. Card networks lay down the law when it comes to payment processing and card transactions. They set up guidelines and offer services to customers through issuing banks. Cardholders do not deal directly with card networks. Issuing and acquiring banks, however, must be members of these card associations in order to issue cards under and accept payments from these branded payment cards.
Examples of card networks include:
- American Express
- China Union Pay
Payment processors may not be someone you hear much about, but they are crucial to the payment cycle.
Processors—operated by or working with a merchant’s acquiring bank—are responsible for the transfer of the transaction and authorization information from the cardholder’s initial purchase through the merchant to the merchant’s acquiring bank. Through the act of processing, they are able to transfer the information needed for the funds to be exchanged after the issuing bank and card association authorize the charge.
If the issuing bank verifies or denies the charge, the processor sends that information to the acquiring bank, who then reports to the merchant whether the transaction is approved or declined. If said transaction is approved, the processor then moves the funds from the issuing bank to the acquiring bank. Back-end processors
Payment gateways are used by merchants in every card-not-present transaction the way a point of sale terminal is used in card-present sales. When consumers make credit card transactions in a brick and mortar store, they swipe their payment card through a point-of-sale terminal that reads the transaction information off the card. A payment gateway, however, has the information keyed into it either by the customer himself when placing an order, or by an employee of the company when taking an order. Both the point-of-sale terminal and the payment gateway act as a mode of communication between the merchant and the acquirer. The payment gateway facilitates the transaction authorization process and encrypts the transaction information before sending it to the acquirer. Payment gateways are a step that enhances security, accuracy, and efficiency in card-not-present transactions.
Unsure of How to Proceed?
The language of credit card transactions is often difficult to understand. A small segment of these transactions, chargebacks, is even more confusing. If you’d like help understanding chargebacks or credit card transactions in general, let us know. We’ll help you cut through the confusing jargon, reduce risks, and increase profits.