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It’s easy to take for granted the lightning-fast technology that allows money to exchange hands instantly when using a credit card. Hand over the plastic to pay for something, stare blankly as the cashier swipes, and before you know it the receipt is printed. But behind that mundane card is an intricate system working to securely shuttle money to the right place.

Next time you mindlessly tap to pay for a morning coffee, take a moment to appreciate the invisible payment network sparking to life. Information zips from merchant to bank and back again in seconds. Your account is checked for sufficient funds and then, in the blink of an eye, authorized for the transaction.

But how exactly does a small plastic card ferry money instantly and securely? This fascinating process involves more than watching paint dry at the cash register. Read on to dive into the behind-the-scenes steps that allow credit card transactions to happen smoothly in a matter of seconds.

Step-by-Step Credit Card Transaction Process

So, how does credit card processing work? Here is a quick overview of the eighth key steps involved:

Step 1: Cardholder Presents Card to Merchant

The first step occurs right in front of you – you present your physical credit card or virtual wallet to the merchant to pay for goods or services. This card contains your name, account number, expiration date, and security code that will authorize the transaction.

Step 2: Merchant Sends Information to Merchant Services Provider

After you provide your card information, the merchant then sends it along with the payment amount to their merchant services provider. This financial intermediary, also called a payment processor, handles credit card transactions on behalf of the merchant.

Step 3: Merchant Services Provider Routes to Card Network

The merchant services provider acts as middleman, passing your credit card data and authorization request to the store’s chosen card network. This is typically Visa, Mastercard, American Express or Discover.

Step 4: Card Network Identifies Issuing Bank

Whichever card network receives the information looks at the first few digits of your card number to identify the issuing bank. Your card number essentially contains instructions about where to send the transaction data.

Step 5: Card Network Sends Data to Issuing Bank

The card network routes all the details over to the bank that issued your card. This issuing bank holds your credit account that will fund the purchase.

Step 6: Issuing Bank Approves/Declines Transaction

Here is where the magic happens – the issuing bank receives the authorization request and immediately checks that your account is valid, open, and has sufficient funds or available credit for the transaction. It evaluates within milliseconds, using algorithms to determine authorization.

Step 7: Approval Goes Back Through Network to Merchant

If everything checks out, the issuing bank sends an approval code back through the card network, which relays it to the merchant services provider. This entire roundtrip typically takes just seconds.

Step 8: Merchant Completes Transaction

Finally, the merchant services provider communicates the approval to the merchant. This notification lets the merchant know they can safely complete the transaction with you, the cardholder.

With approval verified, you walk away with your goods or services! Meanwhile, the funds are deposited into the merchant’s account, minus a small transaction fee. Although the customer sees a direct payment, the merchant only receives the money after the settlement process is complete.

While the transaction process seems straightforward on the surface, it involves many coordinated exchanges between players to happen instantly and securely. When you factor in that there are over 2.8 billion credit cards around the globe, this process becomes even more impressive. So, next time you pay with plastic, appreciate the hidden work to make it frictionless!

Identifying the Key Players and Their Roles

Several key players participate in the credit card transaction process. Each has an important role in making payments fast, seamless, and secure.

Cardholder – The consumer making a purchase with their credit card. They initiate the transaction by presenting a card to the merchant.
Merchant – The business supplying goods or services to the cardholder and accepting credit card payments. Merchants must have merchant services set up to accept credit cards.
Merchant Services Provider – Also called a payment processor, this is an intermediary company that handles credit card transactions on behalf of the merchant.
Card Network – The network linking issuing banks with merchants. They route transaction information between the two. The major card networks are Visa, MasterCard, American Express, and Discover.
Issuing Bank – The financial institution that issued the credit card to the cardholder and holds their account. Can be a bank, credit union, or other lender. They approve or decline transactions based on the cardholder’s account status.
Acquiring Bank – The bank that processes credit card transactions on behalf of the merchant. They handle deposits into the merchant’s account.

This cast of players cooperates to facilitate the quick and secure movement of funds between consumers and businesses. Smooth coordination between them drives the speed and reliability of credit card payments.

Final Word

That little plastic card in your wallet is your ticket to seamless shopping. But behind your smooth payment experience is a fascinating coordination you never see. Every time you tap, dip, or swipe, an intricate process kicks into high gear to authorize your transaction instantly. Although it seems mundane on the surface, your credit card conceals sophisticated technology allowing billions of secure purchases daily.

Between merchants, processors, card networks, and banks, information zips back and forth in a choreographed sequence. Blazing-fast communication and fraud checks happen behind the scenes so your funds can be approved in seconds. So next time you’re standing there staring blankly as your card is processed, take a moment to appreciate the hidden payment network sparking to life. Your credit card may seem ordinary, but behind each transaction is an extraordinary system powering the modern economy. Your payment may be smooth, but behind the scenes, things are moving swiftly!

With the advent of widespread remote work, businesses have made impressive leaps in eliminating checks and adopting electronic supplier payments. These changes primarily translated to increasing the number of ACH or Direct Deposit payments made. According to Nacha—the governing body for the ACH network—business-to-business payments for supply chains, supplier payments, bills, and other transfers increased by almost 11% in 2020. But as organizations adopt electronic payment processes, there’s another strategic opportunity for AP to consider: electronic credit card.

Most companies’ payments flow through AP, yet few AP departments today are making significant use of credit cards to their fullest potential. Historically, companies use credit cards as a decentralized way to manage expenses. In order to do their jobs, employees need to spend efficiently, without going through a bureaucratic process. Traditional commercial programs have been focused on companies giving their employees purchasing cards (p-cards) or travel and entertainment cards (T&E cards) which they could use for supplies, meals, or departmental expenses such as software subscriptions, and marketing expenses—items that would be classified as indirect spending. However, while the benefits of these programs are clear, even in a depressed travel environment, it falls short of the full potential of complete credit card utilization.

Old vs. New

Companies can establish guardrails for spending on these cards. They can add controls to limit employee spending or only allow them to spend in certain places. There are also mechanisms in place to do post-transaction reviews and allow for remediation for inappropriate spending. Due to the combination of convenience and control, finance departments often think about cards as tools for employee productivity, with customizable spending controls.

This only touches on one aspect of company spending, however. Companies spend far more of their budget through traditional purchase orders and invoices for direct expenses like materials, components, freight, and labor. The idea that AP could utilize a card for direct expenses has still not been widely accepted.

Cards provide easy access to working capital and offer rewards like cash back or points. Many companies appreciate that cards are a better electronic payment option due to these benefits. The question then becomes: how do you build a successful card program in accounts payable? Generally, businesses have to make card processes work within their pre-existing AP infrastructure, which usually includes a supplier interaction component and a technical component that traditional players (banking institutions) in this space are not fully equipped to handle.

For example, banks primarily look at credit cards as another form of lending. They offer credit lines, which their customers spend against and pay back. Paying supplier by card usually enables businesses to reach their top 10 or 20 suppliers. That’s usually considered a successful lending program, but to interact with more suppliers, integrate with an ERP, or offer enhanced reconciliation data, banks don’t usually have the technical resources, because it’s beyond their traditional lending model.

Incorporating the New

Bank business models usually focus on building and maintaining a vast merchant acceptance network. You can walk into tens of millions of locations worldwide and if they have the Mastercard or Visa logo, you can use your credit card there, no questions asked. But when it comes to payments for suppliers, the acceptance network is inconsistent. Some suppliers don’t accept payment by card, or only accept them from certain customers depending on speed of payment, the margins, and the type of product that they’re selling. Due to these factors, paying by bank-issued card requires the vendor engagement process to include finding suppliers that already accept specific card types, ensure they accept that payment type from other customers, and locate new card-accepting suppliers.

That’s where fintechs really shine, because their business models are built to incorporate a supplier engagement process aimed at getting more spend on cards. Where banks generally looking for the top 10 to 20 suppliers, which might account for 70 percent of your total spend, fintechs go after the tail—that 30 percent of spend that probably accounts for more than 60 percent of your suppliers and takes more work to get on board. Essentially, they build out a B2B acceptance network inside the credit card acceptance network.

Scaling the Mountain Towards Change

Operationalized re-engagement models are a particularly important component of this business model because most companies churn 10 to 20 percent of their suppliers each year. Within two years, business’ supplier pools are different by 20 percent from when they began, so they must reach out constantly to maintain certain payment acceptances. While banks don’t always have the capacity to offer supplier acceptance maintenance, fintechs thrive when they include those services in their business model.

There are multiple benefits of capturing tail spend on cards. For example, doing so opens the door to paying more suppliers electronically, earning businesses more working capital and a higher potential for rebates. Virtual cards come with security and controls that plastic cards do not usually possess, including single-use numbers that are tied to unique suppliers and payment amounts. Tag on reconciliation data options, and the system becomes something that benefits accounts receivable as much as accounts payable. This opens more suppliers up to the idea of accepting electronic forms of payment.

Fintechs—technology-focused by nature—build their systems with a holistic viewpoint in mind, preferring to create software that doesn’t sacrifice one business’ operations for another’s. By enhancing the system end-to-end, previously reluctant accounts receivable teams, who felt strong-armed into giving up outdated payment processes, often become more willing and interested to learn about electronic alternatives.

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Rick Fletcher is the Comdata President of Corporate Payments, where he specializes in sales, marketing and product strategy, operations, and customer service.

Behind the Scenes: A Peek Into the Credit Card Transaction Process