What is Merchant Processing?

What is Merchant Credit Card Processing and How Can it Help Your Business?

A merchant credit card processor is a financial service provider that enables businesses to accept credit and debit card payments from their customers. It acts as an intermediary between the merchant (business) and the various card networks, such as Visa, Mastercard, American Express, and Discover.

When a customer makes a purchase using a credit or debit card, the transaction details are sent to the merchant credit card processor. The processor securely communicates with the card network to verify the customer's card details and availability of funds. Once the transaction is authorized, the processor facilitates the transfer of funds from the customer's cardholder account to the merchant's account.

Here's a step-by-step overview of how a merchant credit card processor works:

1. Card Authorization: When a customer makes a purchase, the merchant's point-of-sale system sends the transaction details (card number, expiration date, CVV, transaction amount, etc.) to the credit card processor for authorization.
2. Authorization Request: The processor forwards the transaction details to the appropriate card network (e.g., Visa, Mastercard) for verification. The card network checks if the card is valid, whether the customer has sufficient funds, and if any fraud alerts are triggered.
3. Authorization Response: The card network sends an authorization response back to the processor, indicating whether the transaction is approved or declined. If approved, it may also include additional information like an authorization code.
4. Transaction Settlement: After receiving the authorization, the merchant processes the sale and completes the transaction. At the end of the day or a specified settlement period, the merchant submits a batch of authorized transactions to the processor.
5. Clearing and Funding: The processor forwards the batch of authorized transactions to the respective card networks for clearing. During this process, the funds are transferred from the customer's cardholder account to the merchant's account.
6. Merchant Account Funding: Once the card network confirms the clearing process, the processor deposits the funds into the merchant's designated bank account, minus any applicable fees or processing costs.

Additionally, merchant credit card processors may offer additional services such as reporting and analytics, chargeback management, fraud prevention tools, and integrations with other business systems. They may also provide hardware or software solutions to facilitate card payments, including point-of-sale terminals, payment gateways for online transactions, and mobile payment options.

Merchants typically enter into agreements with credit card processors, where they agree to pay fees and a percentage of each transaction for the processing services provided. These fees may vary based on factors such as transaction volume, average ticket size, industry type, and the level of risk associated with the business.