When a cardholder presents its credit card for payment, an amazing amount of activity must take place to ensure that the Merchant is ultimately funded for the transaction. Depending upon the type of connectivity between the Merchant and the processor, and which Issuing Bank is behind the card, all of this activity can take place in less than half a second.

Authorization
The best example of this is a cardholder making a purchase with their credit card at a retail store. You must obtain a valid authorization. If you do not get an authorization and you let merchandise leave your store you are taking a huge risk.

1. The process begins when the cardholder provides its credit card to the Merchant for payment.

2. The Merchant will then enter the card into a terminal or other application by swiping the card through a device that reads the magnetic encoded information on the back of the card.

3. The card information, dollar value of the transaction and specific information identifying the Merchant is packaged, formatted and sent electronically to the Merchant’s processor.

4. The processor identifies which “brand” is backing the card, based on the first 6 digits of the card commonly referred to as the BIN, then electronically routes the authorization request to the appropriate Card Association.

5. The Card Association will be able to identify which financial institution issued the card and will electronically send the authorization request to that institution.

6. The Issuer (Issuing Bank) will either approve or decline the transaction and send the response back to the Card Association.

7. The Card Association will send the response back to the Merchant’s processor.

8. The Merchant’s processor will then route the transaction back to the Merchant.

9. The Merchant will receive an Approval, Denied, or Referral response and finalize the transactions based on the response received.

• Approval – If the request comes back Authorized, this indicates that the card has enough funds to cover the purchase, and the transaction is complete.

• Declined – If the request comes back Declined, the card balance cannot cover the purchase and an alternate payment method must be requested. Do not attempt another authorization on that card for another 24 hours. No matter how much the customer may plead for you to do it, doing so may flag your account for suspicious activity. Once a true DECLINE is received it will not change at the Issuing Bank until the next day. If the customer is really pushing the issue and you want to make them happy, offer to call the Issuing Bank by phone. This will not be seen as suspicious activity.

• Referral - If the Merchant receives a Voice Authorized Required or Referral response, the Merchant must call the voice center to retrieve a verbal authorization or decline, or request a different card.

Settlement
At the close of business or the next morning prior to opening, the Merchant will submit all of its authorized transactions. This group of transactions is typically referred to as a batch.

1. The Merchant will package the transactions into a batch and electronically submit the batch to the processor.

2. The processor electronically sends the batch to the Merchant’s Merchant Bank.

3. The Merchant Bank issues a credit to the Merchant for the amount of the batch.

4. The Merchant Bank sends the individual transactions to the Card Association based on the card’s brand.

5. The Card Association sends the Merchant Bank a payment for the batch of transactions.

6. The Card Association identifies the Issuing Bank for each transaction; routes each settled transaction to its Issuing Bank and then drafts a payment from the Issuing Bank.

7. The Issuing Bank then posts the transaction to the cardholder’s account and, at the appropriate time, sends the cardholder a statement reflecting the transaction and requesting payment.

8. The cardholder receives its statement and sends back a payment to the Issuing Bank.