The process of credit card processing involves

• The card holder
  
• The card issuer, which is the bank that issues the credit card to the cardholder;
  
• The merchant
  
• The merchant acquirer, which is often a bank that processes transactions on behalf of the merchant
  
• The card association- examples of which include VISA or MasterCard.
  

Collecting payment through the interchange systems is a two-part process:

The Clearing Process- The clearing process does not involve any financial transaction but is an exchange of data. The information regarding a sale is provided to the issuer by the acquirer. Also, the acquirer provides data to the issuing bank to help identify the cardholder’s account and provide the dollar amount of the sales. The issuing bank then draws against the card holder’s available credit and prepares to make a payment to the acquirer.

Settlement- The settlement process undertakes the actual exchange of funds. The issuer sends a record to the acquirer containing details of the amount being paid. From this account the acquirer pays the merchant. These transactions take place through accounts with banks that are members of the Federal Reserve System. Payments to merchants are made through an electronic funds transfer system, called the Federal Reserve’s Automated Clearing House (the “ACH”).

Credit card transactions involve front-end processing and back-end processing.

Front end Processing involves the authorization by the issuer that a particular account may be charged for the amount of the sale. Authorization may be completed by swiping a card’s magnetic strip through the point of sale terminal’s card reader or the information may be keyed into the terminal in order to get an electronic response. Authorization may also be obtained through other methods such as voice authorization and electronically generated audio responses (ARU).

Electronic Draft Capture involves the transferring of data about sales draft, electronically for clearing and settlement.

Back end processing is the process that ensures that all fund transfers are recorded to the proper merchant or cardholder account. In addition, the acquirers are provided reports containing settlement data, security and fraud data, retrieval and chargeback data, and Funds disbursements data.

Thus, credit card processing is carried out as explained above. For internet transactions and other options where the card is not physically present, the basic process remains the same but can have additional processing steps.