Payment Processing Basics
From the time a merchant accepts his customers credit card, to the time they receive payment in the bank, three main processes occur:
Part 1: Authorization
It’s important to understand authorization, because without it, you won’t be able to accept your customer’s credit card for payment.
Authorization is the process of confirming that the customer’s credit card has adequate credit to purchase goods or services from you, and also confirms whether the card is valid. You can obtain authorizations through a point of sale terminal, e-commerce Web site, or over the phone.
Authorization follows these steps, and this entire process occurs within seconds:
1. Your customer presents his or her credit card information to you in order to make a purchase. This can happen in person, over the phone or your customer may enter this information into your e-commerce site.
2. The merchant transmits this information to Global Processing Systems (for instance, in a card-present environment, you swipe the credit card and enter the dollar amount, then send this information to us).
3. Global Processing Systems forwards this request to the card payment brand such as Visa® or MasterCard®.
4. The payment brand sends your request to the card issuer (the card issuer is the bank that issued the card to the customer).
5. The issuer will approve or decline the requested transaction, and this response is sent to the payment brand.
6. The payment brand sends the response to Global Processing Systems.
7. Global Processing Systems forwards the response to you (either via your point-of-sale device, e-commerce web site or we can provide it to you verbally over the phone), to complete the transaction.
8. The card will either be approved and you will receive an authorization number, or it will be declined or referred.
Approvals, Declines and Referrals
Approval: An approval indicates that the dollar amount you specified has been reserved from the cardholder’s available credit limit for future settlement.
Decline: A decline means that the customer’s card cannot be used to complete the purchase, and that the merchant needs to ask for an alternate type of payment.
From the merchants stand point, all that matters is whether the customer can use the card for payment or not. Since it is not the merchants responsibility to explain to the customer why his or her card was declined, this information is not transmitted to with the decline. If a customer wants to know the reason for the denial, he or she should use the customer service contact information on the back of their credit card to get more information. The merchant must realize that whether or not the customer says there is a mistake, the merchant will not be paid for a declined card.
The response of approval or decline comes directly from the card issuing bank and is therefore the banks answer. It is not an “error” in the system. The customer must contact the card issuing bank and resolve the issue with them. The merchant will not be paid unless the card is run and an approval code is issued.
Be aware that you may receive a declined response for a number of reasons — for instance, it may be because of a temporary situation such as a customer going over his or her credit limit, or another issue, such as when a card is lost or stolen.
Referral: A referral is a request for additional information from either the card holder or the merchant. This must be done before an authorization can be issued. This may be done for security purposes. At this point, the issuer may request to speak with you or your customer/cardholder over the phone to confirm the legitimacy of the transaction before issuing the authorization. A typical example of when this occurs is if the cardholder is trying to make a purchase in a foreign country, is using their card more than usual in a short amount of time, or has reached the credit limit.
Part 2: Settlement
The sale is complete. Depending on your business type, your customer has either left your store, logged off your Web site or hung up the phone and considers the sale complete. For you, however, the transaction is still in process, since it must now be settled so you can finish the process to allow your funds to be sent into your bank account.
Settlement is the process of managing electronic payment transactions so they can clear and be funded. To make this happen, you, as the merchant, must present approved card transactions to Global Processing Systems. We then submit those approved transactions to the payment brands for clearing through interchange. You may hear these transactions referred to as “deposit” transactions. Settlement, close, batch are all terms for the same function.
This is how settlement works:
1. You send your transaction information to us. For instance, you use your point-of-sale device to trigger, or “batch”, a settlement.
2. We forward your settlement request to Visa, MasterCard or the appropriate payment brand (AMEX, Discover) for confirmation with the cardholder’s issuing bank.
3. The payment brand receives the settlement request and does two things:
Issues a credit to Global Processing Systems so we can reimburse you for the amount of the settled transaction. The issuer then pays Global Processing Systems for the transaction.
Issues a debit to the card issuing bank to charge them for the settled transaction.
4. The card issuing bank then posts the transaction to the customer’s/cardholder’s account. At the end of the billing period the issuer sends your customer/cardholder their monthly statement.
5. The card issuing bank then posts the transaction to the customer’s/cardholder’s account. At the end of the billing period the issuer sends your customer/cardholder their monthly statement.
The cardholder receives his or her credit card statement and pays the bill to the card issuing bank.
Part 3: Funding
The funding process takes place when Global Processing Systems deposits money into your bank account to compensate you for transactions processed, and is really an extension of settlement. Sometimes the terms “settlement” and “funding” are used interchangeably.
In order for us to fund you as quickly as possible, you should be sure to settle your terminal at least once per day.